As filed with the Securities and Exchange Commission on November 30, 2000
Registration No. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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SUNSHINE PCS CORPORATION
(Exact name of Registrant as specified in its charter)
DELAWARE 4812 13-4141279
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification
Number)
421 HUDSON STREET #524
NEW YORK, NEW YORK 10014
(212) 675-1920
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
KAREN E. JOHNSON
PRESIDENT
421 HUDSON STREET #524
NEW YORK, NEW YORK 10014
(212) 675-1920
(Name, address, including zip code, and telephone number,
including area code, of agent of service)
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Copy to:
DAVID J. ADLER, ESQ.
OLSHAN GRUNDMAN FROME ROSENZWEIG & WOLOSKY LLP
505 PARK AVENUE
NEW YORK, NEW YORK 10022
(212) 753-7200
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration Statement.
If any of the securities being registered on this form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, check the following box. |_|
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. |_|
If this form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. |_|
If delivery of the Prospectus is expected to be made pursuant to Rule
434, please check the following box. |_|
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CALCULATION OF REGISTRATION FEE
<TABLE>
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TITLE OF EACH CLASS PROPOSED MAXIMUM PROPOSED MAXIMUM
OF SECURITIES AMOUNT TO BE AGGREGATE OFFERING AGGREGATE AMOUNT OF
TO BE REGISTERED REGISTERED PRICE PER UNIT OFFERING PRICE REGISTRATION FEE
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<S> <C> <C> <C> <C>
Class A common
stock, $0.0001 par
value(1)................. 2,821,766 .0001(2) $282.18 $.08
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(1) Shares of common stock of the registrant being distributed to
stockholders of Lynch Interactive Corporation.
(2) The registrant had a negative book value at October 31, 2000, and
accordingly under Rule 457(f)(2), the filing fee is based on one-third
of the principal amount of the aggregate par value of the securities
being registered.
THE REGISTRANT MAY FILE AN AMENDMENT TO THIS REGISTRATION STATEMENT
WHICH WOULD DELAY ITS EFFECTIVE DATE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE COMMISSION, ACTING PURSUANT
SECTION 8(A), DETERMINES ITS EFFECTIVE DATE.
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LYNCH INTERACTIVE CORPORATION
401 THEODORE FREMD AVENUE
RYE, NEW YORK 10580
(914) 921-8821
_____________, 2000
To Lynch Interactive Stockholders:
I am writing to advise you about a spin-off of the stock of Sunshine PCS
Corporation, which you will receive shortly through a distribution on your Lynch
Interactive common stock.
Lynch Interactive presently owns 49.9% of the outstanding Class A common stock
of Sunshine PCS Corporation. Sunshine PCS Corporation was incorporated in July
2000 as the successor to Fortunet Communications, L.P, a partnership formed in
1997 by parties holding C-Block personal communications services licenses.
Sunshine PCS Corporation presently holds three such C-Block licenses to serve
approximately 900,000 people in the Florida cities of Tallahassee, Panama City
and Ocala. The total cost of these licenses was approximately $15.8 million,
after a 25% bidding credit provided by the Federal Communications Commission. A
subsidiary of Lynch Interactive provided approximately $21 million of debt
financing, which together with $59.0 million of accrued interest, including
commitment fees, is to be converted into $16.1 million principal amount of
subordinated notes at the time of the spin-off. In addition, in consideration of
the agreement by Lynch Interactive to convert this indebtedness and the payment
of $250,000, at the time of the spin-off, Lynch Interactive will acquire
warrants to purchase 4,300,000 shares of Class A common stock of Sunshine PCS
Corporation, which represents approximately 43% of the total common stock
outstanding on a fully diluted basis, and preferred stock with a liquidation
preference of $10 million.
For each share of Lynch Interactive common stock owned by you on __________,
2000, you will receive one share of Class A common stock of Sunshine PCS
Corporation. The distribution is expected to be made on or about __________,
2000. Lynch Interactive stockholders, in the aggregate, will receive 49.9% of
the outstanding common stock of Sunshine PCS Corporation. Due to FCC
regulations, Lynch Interactive stockholders will only receive Class A common
stock, which will have lesser voting rights than the Class B common stock, and
will have minority representation on the Board of Directors of Sunshine PCS
Corporation. However, from an economic standpoint, the two classes of common
stock will be treated equally.
For further information about Sunshine PCS Corporation and the spin-off, please
read the enclosed prospectus. As described more fully in the prospectus, while
the spin-off will be taxable to stockholders, the taxable amount is expected to
be nominal.
Mario J. Gabelli
Chairman of the Board and
Chief Executive Officer
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PRELIMINARY PROSPECTUS DATED NOVEMBER 30, 2000
2,821,766 Shares
Class A common stock
SUNSHINE PCS CORPORATION
This prospectus relates to the spin-off of 2,821,766 shares of our
Class A common stock by Lynch Interactive Corporation ("Lynch Interactive")
through a distribution to its stockholders. At this time, Lynch Interactive owns
all of our outstanding shares of Class A common stock, which represents 49.9% of
our common equity.
In the spin-off, Lynch Interactive will distribute all of its shares of
our Class A common stock on a pro rata basis to the holders of Lynch Interactive
common stock. Each of you, as a holder of Lynch Interactive common stock, will
receive one share of our Class A common stock for each share of Lynch
Interactive that you held at the close of business on _________, 2000, the
record date for the spin-off. Immediately after the spin-off, Lynch Interactive
will not own any shares of our common stock, although it will continue to retain
its ownership interest in $16.1 million principal amount of our subordinated
notes, preferred stock with a liquidation preference of $10.0 million and
warrants to purchase at a price of $.75 per share 4,300,000 shares of our Class
A common stock, which represents approximately 43% of our common equity on a
fully diluted basis.
We are sending you this prospectus to describe the spin-off. We expect
the spin-off to occur on __________, 2000. No stockholder vote is required for
the spin-off to occur and you do not need to take any action to receive the
shares of our Class A common stock to which you are entitled in the spin-off.
This means that:
o you do not need to pay anything to Lynch Interactive or to us;
and
o you do not need to surrender any shares of Lynch Interactive
to receive your shares of our common stock.
The Class A common stock is not expected to be listed for trading on
any national securities exchange or quotation system. Due to FCC regulations,
our Class A common stock has lesser voting rights than our Class B common stock,
along with minority representation on our Board of Directors. See "Description
of Capital Stock," beginning on page 30.
THE SECURITIES OFFERED INVOLVE A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" ON PAGES 8 THROUGH 13 BELOW.
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WE ARE NOT ASKING YOU FOR A PROXY OR FOR ANY CONSIDERATION AND YOU ARE
REQUESTED NOT TO SEND US A PROXY OR ANY CONSIDERATION.
--------------------------
THE SECURITIES AND EXCHANGE COMMISSION AND STATE SECURITIES REGULATORS
HAVE NOT APPROVED OR DISAPPROVED THESE SECURITIES, OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
-------------------------
The date of this prospectus is November 30, 2000.
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AVAILABLE INFORMATION
We have filed a registration statement on Form SB-2 with the SEC to
register our Class A common stock that the Lynch Interactive stockholders will
receive in the spin-off. This prospectus is part of that registration statement,
but does not include all of the information you can find in that registration
statement or the exhibits to the registration statement. For additional
information, please see the registration statement and its exhibits. Statements
in this prospectus regarding the terms of any contract or document are not
necessarily complete and in each instance, if the contract or document is filed
as an exhibit to the registration statement, please see the copy of the contract
or other document filed as an exhibit to the registration statement. Each
statement is qualified in all respects by the relevant reference.
After the spin-off, we will file annual, quarterly and special reports,
proxy statements, and other information with the SEC. We intend to furnish our
stockholders with annual reports containing consolidated financial statements,
certified by an independent public accounting firm. The registration statement
is, and these future filings with the SEC will be, available to the public at
the public reference facilities at the SEC's office at 450 Fifth Street, N.W.,
Washington, D.C. 20549. Such material may also be accessed electronically
through the SEC's home page on the Internet at http://www.sec.gov. Please call
the SEC at 1-800-SEC-0330 for more information.
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PROSPECTUS SUMMARY
THIS SUMMARY HIGHLIGHTS INFORMATION CONTAINED ELSEWHERE IN THIS
PROSPECTUS. IT IS NOT COMPLETE AND MAY NOT CONTAIN ALL OF THE INFORMATION YOU
SHOULD CONSIDER WITH REGARD TO THE CLASS A COMMON STOCK. YOU SHOULD READ THE
ENTIRE PROSPECTUS CAREFULLY, PAYING PARTICULAR ATTENTION TO THE SECTION ENTITLED
"RISK FACTORS," ALONG WITH THE FINANCIAL STATEMENTS AND THEIR NOTES. SOME OF THE
STATEMENTS CONTAINED IN THIS SUMMARY, AS WELL AS THE SECTIONS ENTITLED "RISK
FACTORS," "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND PLAN
OF OPERATION" AND "THE WIRELESS COMMUNICATIONS INDUSTRY" ARE FORWARD-LOOKING.
THESE STATEMENTS DISCUSS REGULATORY REQUIREMENTS, THE START UP NATURE OF OUR
BUSINESS, LIQUIDITY AND CAPITAL EXPENDITURES, DEBT AND THE ABILITY TO OBTAIN
FINANCING AND SERVICE DEBT, COMPETITIVE CONDITIONS IN THE INDUSTRY, AND GENERAL
ECONOMIC CONDITIONS. ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE SUGGESTED
BY THE FORWARD-LOOKING STATEMENTS FOR VARIOUS REASONS, INCLUDING THOSE DISCUSSED
UNDER "RISK FACTORS." ALL REFERENCES TO THE "COMPANY," "WE," "OUR," OR "US"
REFER TO THE OPERATIONS OF SUNSHINE PCS CORPORATION OR ITS PREDECESSORS.
THE COMPANY
We were incorporated in July 2000, as the successor to Fortunet Communications,
L.P. We hold three 15 megahertz ("MHz") personal communications services ("PCS")
licenses granted to us by the Federal Communications Commission ("FCC") to serve
a population of approximately 900,000 in the Florida cities of Tallahassee,
Panama City and Ocala. The total cost of these licenses at auction was
approximately $15.8 million, after a 25% bidding credit provided by the FCC. A
subsidiary of Lynch Interactive provided approximately $21 million of debt
financing, which together with $59.0 million of accrued interest, including
commitment fees, is to be converted into $16.1 million principal amount of
subordinated notes at the time of the spin-off. In addition, in consideration of
the agreement by Lynch Interactive to convert this indebtedness and the payment
of $250,000, at the time of the spin-off, Lynch Interactive will acquire
warrants to purchase 4,300,000 shares of Class A common stock of Sunshine PCS
Corporation, which represents approximately 43% of the total common stock
outstanding on a fully diluted basis, and preferred stock with a liquidation
preference of $10 million.
We believe there are significant growth opportunities in the wireless
telecommunications industry. According to the Cellular Telecommunications
Industry Association, on December 31, 1999, there were 86 million wireless
telephone subscribers in the United States, representing an overall wireless
penetration rate of 28% and a subscriber growth rate of 24% from the prior year.
We believe this growth will continue, and that PCS will gain an increasing share
of it due to shrinking costs, greater service offerings and increased public
awareness of the productivity, convenience and privacy that PCS offers. We also
believe the rapid growth of notebook computers and personal digital assistants,
combined with emerging software applications for the delivery of electronic
mail, telecopy and database searching, will contribute to the growing demand for
wireless service.
We have not adopted a business plan or determined how to finance our
operations. Uncertainties relating to the PCS industry, such as the relative
newness of PCS, the volatile history of the industry, and the financial problems
of the FCC's C-Block PCS licensing framework make evaluating our business
difficult. We have not determined whether to develop our PCS licenses alone or
through a joint venture, or to sell some or all of them. FCC regulations also
impose build out requirements for our licenses, which must be met by September
17, 2001.
Our address is 421 Hudson Street #524, New York, New York 10014. Our
telephone number is (212) 675- 1920.
INFORMATION CONCERNING LYNCH INTERACTIVE AND THE SPIN-OFF
Lynch Interactive currently owns all of the issued and outstanding
shares of our Class A common stock, and will own our subordinated debt,
preferred stock and warrants to purchase additional shares of our Class A common
stock. The shares of Class A common stock owned by Lynch Interactive, which will
be distributed in the spin off, represent 49.9% of our outstanding common stock.
Lynch Interactive will distribute these shares to its common stockholders of
record, as of _________, 2000. Lynch Interactive may be considered an
underwriter for purposes of liability under Section 11 of the Securities Act of
1933, as amended. Section 11 imposes liability on certain persons, including
underwriters, for losses due to registration statements containing material
misstatements
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or omissions, unless the underwriter exercised due diligence. Due diligence
means that after reasonable investigation, the person had reasonable grounds to
believe, and believed, that there were not any material misstatements or
omissions in the registration statement.
Lynch Interactive stockholders of record will initially have their
ownership of our Class A common stock registered in book-entry form, and no
certificates will be issued. On the distribution date, each Lynch Interactive
stockholder, at the close of business on the record date, will be credited
through book-entry in the records of the transfer agent with the number of
shares of our Class A common stock distributed to them. Each Lynch Interactive
stockholder will receive an account statement indicating the number of shares of
our Class A common stock that the stockholder owns. Lynch Interactive
stockholders that hold their stock in street name will have our Class A common
stock credited to their brokerage accounts. Following the distribution date,
Lynch Interactive stockholders may obtain, at any time without charge, a
certificate that represents our Class A common stock.
We do not intend to list our Class A common stock on any national
securities exchange or automated quotation system. Accordingly, we are unable to
predict whether a trading market will develop for the Class A common stock, and
the ability to buy or sell shares of Class A common stock may be very limited.
The value of the stock distributed in the spin off will be taxable to
the recipient, although we believe that any tax liability will be nominal. See
"Federal Income Tax Consequences."
PROCEEDS OF THE SPIN OFF AND FUTURE FUNDING REQUIREMENTS
The spin off will not result in any net proceeds to us or Lynch
Interactive. While Lynch Interactive will acquire our securities, in part, for
$250,000 in cash, which will be reduced by offering expenses, this money will
only cover short term administrative expenses. In the future, we will need to
obtain additional funds to satisfy FCC build out requirements, unless we sell
our licenses. See "Risk Factors." We cannot predict whether we can raise
sufficient capital to finance the construction of our networks or meet our
working capital requirements. Because we have incurred losses since inception,
have not yet adopted a business plan, determined how to finance our operations,
and may forfeit our licenses or be subject to the imposition of fines and
sanctions if we do not meet certain build out requirements by September 17,
2001, the report of Ernst & Young LLP, our independent auditors, with respect to
our financial statements as of December 31, 1999 and September 30, 2000 and for
the years ended December 31, 1998 and 1999, the nine month period ended
September 30, 2000 and the period from July 27, 1995 (inception) to September
30, 2000, contains an explanatory paragraph as to our ability to continue as a
going concern.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our common stock,
and do not expect to pay cash dividends on our common stock in the foreseeable
future. To the extent we obtain financing in the future, such funding sources
may prohibit the payment of dividends. We currently intend to retain any future
earnings for use in our business.
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RISK FACTORS
YOU SHOULD CONSIDER CAREFULLY THE FOLLOWING RISKS WITH RESPECT TO US
AND OUR CLASS A COMMON STOCK. OUR BUSINESS, FINANCIAL CONDITION OR RESULTS OF
OPERATION COULD BE MATERIALLY ADVERSELY AFFECTED BY ANY OF THESE RISKS. ANY OF
THESE RISKS COULD SHARPLY REDUCE OR ELIMINATE THE VALUE OF OUR CLASS A COMMON
STOCK.
RISKS RELATING TO OUR BUSINESS
OUR LICENSES HAVE FCC BUILD OUT REQUIREMENTS THAT WILL HAVE TO BE MET IN LESS
THAN ONE YEAR.
Each of our PCS licenses is subject to an FCC mandate that we construct
PCS networks that provide adequate service to at least one-quarter of the
population in the related PCS market within five years of the date when the
license was granted, or make a showing of substantial service in a licensed area
within five years of the license grant date. As our licenses were granted to us
on September 17, 1996, we must satisfy this build out requirement by September
17, 2001, unless we can obtain a waiver or extension from the FCC. We are unable
to predict whether this required coverage will be achieved in accordance with
FCC requirements, and the prospect of our being able to obtain a waiver or
extension is highly uncertain. Any failure to comply could cause the revocation
of our PCS licenses or the imposition of fines and/or other sanctions by the
FCC.
WE ARE A DEVELOPMENT STAGE COMPANY WITH HISTORICAL AND EXPECTED FUTURE OPERATING
LOSSES.
As we have no operating history, we are subject to all of the risks
typically associated with start-up entities. Through September 30, 2000, we had
cumulative net losses of $77,997,931, no revenue from operations and we do not
know when, if ever, we will have revenues or achieve a positive cash flow. PCS
networks in general have a limited operating history in the United States, and
we cannot predict if there will ever be enough demand to make these networks
profitable.
THE REPORT OF OUR INDEPENDENT AUDITORS CONTAINS AN EXPLANATORY PARAGRAPH
AS TO OUR ABILITY TO CONTINUE AS A GOING CONCERN
Because we have incurred losses since inception, have not yet adopted a
business plan, determined how to finance our operations, and may forfeit our
licenses or be subject to the imposition of fines and sanctions if we do not
meet certain build out requirements by September 17, 2001, the report of Ernst &
Young LLP, our independent auditors, with respect to our financial statements as
of December 31, 1999 and September 30, 2000 and for the years ended December 31,
1998 and 1999, the nine month period ended September 30, 2000 and the period
from July 27, 1995 (inception) to September 30, 2000, contains an explanatory
paragraph as to our inability to continue as a going concern.
WE WILL NEED TO INCUR MORE DEBT IN THE FUTURE TO MEET OUR BUILD OUT
REQUIREMENTS.
We will have cash of approximately $250,000, minus offering expenses,
following the spin-off. While this money will cover short term administrative
expenses, we will need additional capital to continue as a going concern.
Moreover, if we independently develop our licenses, substantial additional funds
will be required. Our potential to secure new financing, however, is
questionable. Following the spin-off, we will be carrying a significant amount
of subordinated debt, and our assets will consist of undeveloped licenses.
Should we succeed in obtaining future financing, any such loans are likely to be
predicated on restrictions that limit or prohibit future actions, and allow the
lender to accelerate the loan upon a default. Thus, any failure or delay in
repaying our current or future debt could materially adversely affect our
business. This fact is especially important, because we are unable to predict
whether our operations will ever generate sufficient cash flow to repay such
debt.
WE HAVE NOT DECIDED HOW TO UTILIZE OUR PCS LICENSES, AND THERE ARE RISKS IF WE
CHOOSE TO SELL, ENTER INTO A JOINT VENTURE, OR BUILD OUT OUR LICENSES.
We have not determined what to do with our PCS licenses. If we decide
to sell them, the FCC and possibly other regulatory agencies must consent to the
transaction, and FCC regulations may impose certain
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penalties, depending on the size of the acquiring party. In addition, if a
license is sold for cash, we will need to redeem a corresponding proportion of
our subordinated debt and preferred stock. On the other hand, if we enter into a
joint venture, we would be exposed to many of the risks associated with
independently developing our PCS licenses discussed below. Potential joint
venture partners may already operate wireless telephones, other
telecommunications operations, or some related business. Thus, if we enter into
a joint venture, or sell our licenses other than for cash, we would be at risk
with respect to these other operations of the joint venturer or purchaser.
If we develop our PCS licenses independently, we would need to
implement a business plan, create an infrastructure, and attract and retain
qualified individuals to serve as managers and employees. Our current management
has very little experience in the PCS industry. We cannot assure you as to the
timing, cost, or even our ability to successfully accomplish these tasks. In
addition to the difficulty in raising additional financing, we would face
numerous additional risks, such as:
o choosing an appropriate network design, proper site selection and
acquisition, equipment availability, and costs associated with
microwave relocation;
o choosing the best digital technology for our network; and
o hiring an effective management team.
Moreover, under any development scenario, we will incur significant
initial operating losses in the foreseeable future, as we seek to construct our
PCS networks and build a customer base. Such losses could be substantial and
jeopardize our ability to service our debt, thus placing us in danger of
default.
Finally, any self or joint development of our PCS licenses will likely
require us to rely on third parties for the provision of equipment and services
and certain functions such as customer billing. We are unable to predict if
these parties will provide acceptable equipment and services on a timely basis,
and any failure to do so would have a material adverse effect upon our business,
results of operations and financial condition.
OUR POTENTIAL COMPETITORS HAVE SUBSTANTIALLY GREATER ACCESS TO CAPITAL AND OTHER
RESOURCES AND SIGNIFICANTLY MORE EXPERIENCE IN PROVIDING WIRELESS SERVICES.
The wireless telecommunications industry generally is very competitive
and competition is increasing. Many of our competitors have substantially
greater resources than we have and if we built out our licenses, we may not be
able to compete successfully.
If we build out our networks, we would compete directly with other
wireless providers and, to some extent, traditional landline carriers in each of
our markets, many of whom have greater resources than we do and would have
entered the market before us. A few of our potential competitors operate
wireless telecommunications networks covering most of the United States.
Competitors' earlier entry and broader presence in the U.S. telecommunications
market could have a negative effect on our ability to successfully implement any
strategy we may adopt. Furthermore, the FCC is actively pursuing policies
intended to increase the number of wireless competitors in each of our markets.
For example, the FCC is expected to auction licenses for so-called "third
generation" wireless services that will authorize the entry of additional
wireless providers in each market.
If we build out our networks, we would also compete with other
companies that use other communications technologies, including paging and
digital two-way paging providers, conventional and enhanced specialized mobile
("SMR") providers, and domestic and global mobile satellite service providers.
These technologies may have advantages over the technology we would use and may
ultimately be more attractive to customers. We would be required to compete in
the future with companies that offer new technologies and market other services,
including cable television access, landline telephone service and Internet
access, which we may not offer. Some of our potential competitors offer these
other services together with their wireless communications service, which may
make their services more attractive to customers. In addition, we expect that,
over time, providers of wireless communications services will compete more
directly with providers of traditional landline telephone services, energy
companies, utility companies and cable operators who expand their services to
offer telecommunications services.
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THE LIMITED CAPACITY OF OUR LICENSES MAY PUT US AT A DISADVANTAGE.
Holders of cellular telephone licenses are authorized by the FCC to use
25 MHz of spectrum each, and certain of the PCS licenses in the A and B-Blocks
are for 30 MHz of spectrum each. By contrast, our C-Block licenses have only 15
MHz of spectrum. This shortfall may limit our growth opportunities as demand
increases for mobile PCS services. In addition, the cost to build out a digital
mobile PCS system to an equivalent standard may be greater with a 15 MHz license
than with either a 25 MHz cellular or 30 MHz PCS license. Potential lenders may
also require that 15 MHz licenses have arrangements in place to procure
additional spectrum. As a result, we may either initially, or at a later time,
enter into a joint venture or make other arrangements with holders of additional
spectrum to provide the amount or breadth of service to be or remain
competitive, or consider providing telephone services other than mobile PCS such
as fixed wireless local loop, data or internet access. FCC regulations limit our
ability to enter into certain arrangements, and we may be unable to enter into
such arrangements on favorable terms or at all.
OUR LICENSES ONLY OFFER LIMITED TERRITORIAL COVERAGE AND SCOPE OF SERVICES.
If we develop our PCS licenses, our service areas would be relatively
limited, which could force us to enter into joint ventures or other affiliation
arrangements to expand our service area and spectrum. However, we cannot predict
whether we could enter into such joint ventures or other arrangements on
favorable terms or at all.
C-BLOCK LICENSES GENERALLY, AND OUR LICENSES, HAVE A TROUBLED HISTORY, AND THE
VALUE OF OUR LICENSES HAS BEEN WRITTEN DOWN AND COULD BE WRITTEN DOWN EVEN MORE.
Fortunet, our predecessor, was the successor to five partnerships that
were awarded 31 PCS licenses in the FCC's 1996 C-Block auction. The licenses had
an aggregate purchase price at auction of $216 million after a 25% bidding
credit, and were financed primarily by the FCC. Under FCC rules, Fortunet made a
down payment equal to 10% of the cost, net of bidding credits of the licenses,
equal to $21.6 million. The FCC provided 10-year installment financing, interest
only for the first six years, at an interest rate of 7% per annum.
Certain C-Block licensees, including Fortunet, experienced substantial
financial problems in servicing the FCC installment debt and/or building out
their licenses. The FCC responded to these troubles by offering licensees
various relief alternatives. Fortunet established a reserve of $6.6 million to
reflect the estimated impairment in value of its licenses. Of the options
offered by the FCC for relief, Fortunet elected to surrender certain licenses
and use 70% of the related down payment to pay off the FCC installment loans on
its remaining licenses, thereby surrendering the remaining 30% of its down
payment. Thus, in June 1998, Fortunet returned 28 of its PCS licenses to the FCC
in exchange for credits, which were used to pay the remaining purchase price for
the three licenses it retained. In retaining these three licenses, which were
originally 30 MHz, Fortunet disaggregated them in half, and returned 15 MHz of
each license to the FCC. On April 15, 1999, the FCC completed a reauction of all
the C-Block licenses that were returned to it subsequent to the original
auction, including the 15 MHz licenses in Tallahassee, Panama City and Ocala
that Fortunet returned in June 1998. Due to considerably lower amounts bid for
these licenses, in the quarter ended March 31, 1999, Fortunet recorded a further
reserve of $18.5 million to write down its investment in the licenses, plus an
additional $0.1 million of capitalized expenses, leaving a net carrying value of
$2.7 million at December 31, 1999. A new re-auction of PCS spectrum, including a
license for 10 MHz in Ocala, FL, where we also have a 15 MHz license, is
scheduled to begin in December 2000. Depending on the value of the licenses at
the auction, we may take a further write down of this investment.
RISKS RELATING TO THE TELECOMMUNICATIONS INDUSTRY
WE ARE SUBJECT TO SUBSTANTIAL GOVERNMENT REGULATION.
The spectrum licensing, construction, operation, sale and
interconnection arrangements of wireless communications networks are regulated,
to varying degrees, by state regulatory agencies, the FCC, Congress, the courts
and other governmental bodies. We are unsure whether these entities will adopt
new regulations, change old ones, or take other actions that would materially
adversely affect our business, financial condition or results of
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operations. Although the FCC has issued rules governing, among other things, the
eligibility, build out, operating and transfer requirements for C-Block PCS
licenses, these rules and requirements are subject to pending FCC rulemaking and
adjudicatory proceedings, and to pending proceedings in the U.S. courts. In
addition, numerous aspects of the FCC's C-Block rules have never been the
subject of definitive guidance by either the FCC or the courts. Accordingly, for
certain matters, such as the structure of our Board of Directors and management,
we rely on informal public and private interpretations of FCC rules. The FCC is
not bound by these informal interpretations, and we are unable to predict
whether the FCC or the courts will agree with them now or in the future. A
failure to comply with FCC rules could subject us to serious penalties and have
a material adverse effect upon our business, results of operations and financial
condition.
Although our PCS licenses are renewable after the expiration of their
10 year terms, there can be no assurance that our licenses will be renewed. In
addition, as a licensee of commercial mobile radio services, we are subject to
numerous pending and future FCC regulations that could adversely affect our
business, financial condition and results of operation.
WE ARE SUBJECT TO VARIOUS C-BLOCK LICENSE REQUIREMENTS.
When the FCC allocated spectrum for PCS by public auction, it
designated the C-Block as an "Entrepreneurs' Block." FCC rules require C-Block
applicants and licensees (collectively, "Entrepreneurs") to meet various
qualifications, including:
o Entrepreneurs' Requirements
o Small Business Requirements
o Control Group Requirements
o Transfer Restrictions
We believe that we have structured ourselves to satisfy the
Entrepreneurs', Small Business and Control Group Requirements and have
structured our Class A and Class B common stock to facilitate compliance with
applicable FCC rules. We have relied on representations of our investors to
determine our compliance with the FCC's rules applicable to C-Block licenses.
However, we cannot assure you that we or our investors satisfy, or will continue
to satisfy, these requirements during the term of any PCS license, or that we
can successfully implement divestiture or other mechanisms included in our
certificate of incorporation designed to ensure compliance with FCC rules. Any
non-compliance with FCC rules could subject us to serious penalties, including
the revocation of our PCS licenses.
THERE ARE POTENTIAL HEALTH AND SAFETY RISKS INVOLVED WITH WIRELESS HANDSETS.
Media reports have suggested that certain radio frequency emissions
from wireless handsets may be linked to various health concerns, including
cancer, and may interfere with various electronic medical devices, including
hearing aids and pacemakers. Although management does not believe radio
frequency emissions raise health concerns, concerns over radio frequency
emissions may discourage the use of wireless handsets, or expose us to potential
litigation which could have a material adverse effect on our financial condition
and results of operations.
Separately, measures that would require hands free use of mobile phones
while operating motor vehicles have been proposed or are being considered in
legislatures in Connecticut, Hawaii, Illinois, Maryland, New York and Ohio,
among other states. We cannot predict the success of the proposed laws
concerning hands free car phone use or their effect on the usage of mobile
phones.
IF WE ARE REQUIRED TO RELOCATE MICROWAVE LICENSEES, THE TIME AND COST OF SUCH
RELOCATIONS MAY HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS.
For up to five years after the grant of a PCS license, PCS licensees
may be required to share spectrum with existing fixed microwave licensees also
operating on PCS frequencies. If we build out our networks to secure a
sufficient amount of unencumbered spectrum to operate them efficiently, we may
need to relocate existing microwave paths to alternate spectrum locations or
transmission technologies. In an effort to balance competing
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interests of existing microwave users and newly authorized PCS licensees, the
FCC has adopted a transition plan to relocate such microwave incumbents and a
cost sharing plan so that if the relocation of an incumbent benefits more than
one PCS licensee, the benefitting PCS licensees share the costs of the
relocation. The transition and cost sharing plans expire on April 4, 2005, at
which time the remaining microwave incumbents in the PCS spectrum will be
responsible for their costs to relocate to alternative spectrum locations. We
cannot assure you that we will be able to reach timely agreements to relocate
these incumbents, or that we could afford the shared costs of such relocation.
Any delay in the relocation of licensees may adversely affect our ability to
commence timely commercial operation and our ability to satisfy our build out
requirements. Furthermore, depending on the terms of such agreements, our
ability to operate our PCS networks profitably may be materially adversely
affected.
RISKS RELATING TO OUR COMMON STOCK
MS. KANE CONTROLS US AND SUCH CONTROL COULD LIMIT POTENTIAL ACQUISITIONS.
Victoria G. Kane, through Fortunet Wireless Communications Corporation,
has at least 50.1% of the voting power of our outstanding equity and may elect
up to three members (the "Class B Directors") to the Board, who have a majority
of the votes on Board matters. Ms. Kane has initially appointed Karen E. Johnson
and David S. Ahl as directors. If Ms. Kane is dissatisfied with such directors,
she can replace them at any time. Ms. Kane's control may deter potential
acquirers. Provisions in our certificate of incorporation, by-laws, and the
General Corporation Law of the State of Delaware may also discourage potential
acquisition proposals.
OUR COMMON STOCK IS JUNIOR TO OUR SUBORDINATED NOTES AND PREFERRED STOCK.
Our common stock is junior to our subordinated debt and preferred
stock. Upon any sale or other disposition for value of our licenses, the
resulting net proceeds would have to exceed $26.1 million before any other
portion thereof would be received by holders of our common stock. Our common
stock would also be junior to any indebtedness we may incur in the future.
LYNCH INTERACTIVE HOLDS WARRANTS TO PURCHASE 4,300,000 SHARES OF OUR CLASS A
COMMON STOCK AT $.75 PER SHARE.
At the time of the spin-off, our negative book value is expected to be
$(2.40) per share. Lynch Interactive will hold warrants to purchase 4,300,000
shares of our Class A common stock at $.75 per share. If the fair market value
of the Class A common stock were to go above $.75 per share, this large number
of warrants could adversely affect subsequent appreciation in value of the
common stock. If all the warrants were exercised, it would dilute the
then-existing stockholders' percentage ownership of common stock, and any sales
in the public market of the common stock issuable upon such exercise could
adversely affect prevailing market prices for the common stock. More
specifically, the full exercise of these warrants would represent approximately
43.2% of the total common stock outstanding and 60.4% of the Class A common
stock. The Class A common stock held by Lynch Interactive stockholders would be
reduced from 49.9% of the total common stock and 100% of the Class A common
stock to 28.3% of the total common stock and 39.6% of the Class A common stock.
There will be a very limited trading market or possibly no trading
market at all in our common stock. We do not intend to list or register the
Class A common stock on any national securities exchange or on any automated
quotation system. Accordingly, we are unable to predict whether a trading market
will develop for the Class A common stock, and the ability to buy or sell shares
of Class A common stock may be very limited.
OUR COMMON STOCK LIKELY WILL BE SUBJECT TO "PENNY STOCK" REGULATIONS.
Our Class A common stock likely will be considered a penny stock. SEC
regulations generally define a penny stock to be an equity security that is not
listed on NASDAQ or a national securities exchange and that has a market price
of less than $5.00 per share, subject to certain exceptions. The regulations of
the SEC require broker-dealers to deliver to a purchaser or prospective
purchaser of a penny stock a disclosure schedule explaining the penny stock
market and the risks associated with it. Various sales practice requirements are
also imposed on broker-dealers who sell penny stocks to persons other than
established customers and accredited investors. In addition, broker-dealers must
provide the customer with other items of information, including current bid and
offer
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quotations for the penny stock, the compensation of the broker-dealer and its
salesperson in the transaction, and monthly account statements showing the
market value of each penny stock held in the customer's account. If our Class A
common stock is subject to the regulations applicable to penny stocks, investors
may find it more difficult to obtain timely and accurate quotes for it and
execute trades in it.
THE FCC'S OWNERSHIP LIMITATIONS MAY AFFECT OUR OWNERSHIP.
The Communications Act requires that non-U.S. citizens, their
representatives, foreign governments, or corporations otherwise subject to
domination and control by non-U.S. citizens may not own of record or vote more
than 20% of the capital contribution to a common carrier radio station directly,
or more than 25% of the capital contribution to the parent corporation of a
common carrier radio station licensee if the FCC determines such holdings are
not within the public interest. Because the FCC classifies PCS as common carrier
offering, PCS licensees are subject to the foreign ownership limits. Congress
recently eliminated restrictions on non-U.S. citizens serving as members on the
board of directors and officers of a common carrier radio licensee or its
parent. The FCC also has adopted rules that, subject to a public interest
finding by the FCC, could allow additional indirect foreign ownership of CMRS
companies to the extent that the relevant foreign states extend reciprocal
treatment to U.S. investors. We believe that we are in compliance with FCC
foreign ownership rules. However, if our foreign ownership were to exceed 25% in
the future, the FCC could revoke our PCS licenses or impose other penalties.
Further, our certificate of incorporation enables us to redeem shares from
holders of common stock whose acquisition of such shares result in a violation
of such limitation. The restrictions on foreign ownership could adversely affect
our ability to attract additional equity financing from entities that are, or
are owned by, non-U.S. entities. The recent World Trade Organization agreement
on basic telecommunications services could eliminate or loosen foreign ownership
limitation, but could also increase our competition. Under this agreement, the
United States and other members of the World Trade Organization committed
themselves to opening their telecommunications markets to foreign competition,
effective as early as January 1, 1998.
USE OF PROCEEDS
Our Class A common stock is being distributed in connection with our
spin-off from Lynch Interactive. Neither Lynch Interactive nor we will receive
any proceeds from the distribution of our stock.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND PLAN OF OPERATION
THIS DISCUSSION CONTAINS FORWARD LOOKING STATEMENTS THAT INVOLVE RISKS
AND UNCERTAINTIES. OUR ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE
DISCUSSED HEREIN. FACTORS THAT COULD CAUSE OR LEAD TO SUCH DIFFERENCES INCLUDE,
BUT ARE NOT LIMITED TO THOSE LISTED IN "RISK FACTORS" COMMENCING ON PAGE 8.
We are a development stage company with no operations to date. Our
ability to develop a profitable PCS business is subject to substantial risks
enumerated under "Risk Factors" and elsewhere in this prospectus. Moreover, as
stated above, because we are a C-Block licensee, we must build out our licenses
by September 17, 2001 to cover one quarter of the population in our PCS market
or we risk losing these licenses and/or the imposition of fines and sanctions by
the FCC. Presently, we do not have the funds to meet these build out
requirements, forcing us to either borrow more money, sell our licenses, or
enter into a joint venture with someone who has the funds necessary to satisfy
the build out requirements. All of these options present various risks.
Moreover, because we have incurred losses since inception, have not yet adopted
a business plan, determined how to finance our operations, and may forfeit our
licenses or be subject to the imposition of fines and sanctions if we do not
meet certain build out requirements by September 17, 2001, the report of Ernst &
Young LLP, our independent auditors, with respect to our financial statements as
of December 31, 1999 and September 30, 2000 and for the years ended December 31,
1998 and 1999, the nine month period ended September 30, 2000 and the period
from July 27, 1995 (inception) to September 30, 2000, contains an explanatory
paragraph as to our ability to continue as a going concern.
Fortunet was formed on April 18, 1997, and at that date acquired the
assets and liabilities of five partnerships (the "Partnerships") that were the
high bidders for licenses in the FCC's C-Block auction. The
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transfers of the assets and liabilities from the Partnerships to Fortunet were
nonmonetary transactions accounted for under accounting Principles Board Opinion
29 "Accounting for Nonmonetary Transactions." All transfers, with the exception
of the transfer from Aer Force Communications, L.P. ("Aer Force"), were
accounted for at fair value, which resulted in an increase in the carrying value
of the PCS licenses. The transfer from Aer Force was accounted for at historical
cost, as Fortunet and Aer Force were entities under common control. Therefore,
the financial statements include the results of Aer Force from inception, July
27, 1995, and the remaining four partnerships from the date of the transfers,
April 18, 1997. (See Note 1 to the financial statements.)
RESULTS OF OPERATIONS
From Fortunet's inception on July 27, 1995 through December 31, 1999,
and the nine month period ended September 30, 2000, interest has accrued on the
indebtedness incurred to acquire its FCC licenses. However, in exchange for
returning a significant portion of these licenses in June 1998, the FCC forgave
$23,524,489 of the debt consisting of all interest accrued and paid to the FCC.
Losses for both the periods ended December 31, 1999 and September 30,
2000 resulted primarily from interest charges, including commitment fees, and
reserves for impairment of our PCS licenses.
RESERVE FOR IMPAIRMENT OF PCS LICENSES
In the FCC's original C-Block auction, which ended in May 1996,
Fortunet acquired 31 licenses at a net cost, after the bidding credits, of $216
million. These licenses were awarded in September 1996. The FCC provided 90% of
the financing for these licenses, at an interest rate of 7% per annum with
interest due quarterly for years one through six, and principal amortization and
interest due quarterly in years seven through ten.
Events during and subsequent to the auction, as well as other
externally driven technological and market forces made financing the development
of these licenses much more difficult than previously anticipated. In 1997,
Fortunet, as well as many of the license holders from this auction, petitioned
the FCC for relief such as reducing interest rates, reducing or delaying the
required debt payments, and relaxing the restrictions of the ownership structure
in order to afford these small businesses a realistic opportunity to restructure
and build out their systems.
To provide some relief, on June 8, 1998, the FCC allowed Fortunet to
apply its eligible credits from its original down payment to pay off all of its
FCC installment debt from its purchase of C- Block licenses for 15 MHz of PCS
spectrum in Tallahassee, Panama City and Ocala, Florida. Fortunet then returned
all of its remaining licenses, including 15 MHz of spectrum in Tallahassee,
Panama City and Ocala, and forfeited $6.0 million of its original down payment
on these licenses in full satisfaction of the government debt. Accordingly,
Fortunet became the licensee of 15 MHz of spectrum in three Florida markets
covering a population of approximately 900,000.
On April 15, 1999, the FCC completed a reauction of all the C-Block
licenses that were returned to it. In that reauction, the successful bidders
paid a total of $2.7 million for the three 15 MHz licenses as compared to the
$21.2 million carrying value thereof at that date. Accordingly, in the quarter
ended March 31, 1999, Fortunet recorded a reserve to write down its investment
in the licenses to reflect the amount bid for similar licenses in the reauction,
plus an additional $0.1 million of capitalized expenses, leaving a balance of
$2.7 million. A new re- auction of PCS spectrum, including a license for 10 MHz
in Ocala, FL, where we also have a 15 MHz license, is scheduled to begin in
December 2000. Depending on the value of the licenses at that auction, a further
write down of this investment may occur.
LIQUIDITY AND CAPITAL RESOURCES
As mentioned above, under FCC regulations, we need to construct a
system to provide PCS services to one-quarter of the population in the areas
covered by our licenses by September 17, 2001. Unless we sell those licenses or
enter into a joint venture, we must raise significant funds to meet this
requirement. However, we are uncertain of our ability to do so. To date, we have
had no revenues or positive cash flow and cannot predict when we may have them.
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The principal amount of indebtedness at December 31, 1999 and September
30, 2000 consisted of $69,760,140 and $79,985,340, including accrued interest
and commitment fees, compared to accumulated deficits of $67,074,129, and
$77,299,328, respectively. Of our $79,985,340 of indebtedness to Lynch
Interactive, $63,854,223, including accrued interest and commitment fees, will
be contributed to our capital, and the remaining indebtedness will be converted
into eight subordinated notes of equal principal amount, which will be freely
transferable subject only to securities regulations, and will have a cumulative
principal amount of $16,131,117 with interest payable through the issuance of
additional debt.
The subordinated notes will mature in three month intervals from
______, 2004 to ____, 2006. Interest will be payable at the rate of 9% per
annum, semiannually in the form of additional principal amounts of the
subordinated debt. Any early payments of these notes will first be applied to
the earliest maturing notes. In other words, there will be no distribution or
"spread" of early payments to all outstanding notes. The subordinated debt will
be redeemable upon a change in control of the Class A or Class B common stock or
the sale of one or more PCS licenses for cash or a non-cash sale that is
subsequently converted into or redeemed for cash in an amount proportional to
that number of persons covered by the sale of such licenses for cash, or that
portion of a non-cash sale subsequently converted into or redeemed for cash,
compared to the total persons covered by our three initial PCS licenses, in each
case based on the 1998 or the most recent estimates by the United States Bureau
of Census. Therefore, the amount of subordinated debt redeemed will be computed
by dividing the number of persons covered by the sale by the total number of
persons covered by the three initial licenses owned by us.
In addition, Lynch Interactive will acquire our preferred stock with a
liquidation preference of $10.0 million and warrants to purchase at a price of
$.75 per share 4,300,000 shares of our Class A common stock in consideration of
the conversion of indebtedness owed to it and the payment of $250,000. Such
funds alone will not be sufficient for us to meet any meaningful portion of the
cost of our build out requirements.
THE WIRELESS COMMUNICATIONS INDUSTRY
GROWING DEMAND FOR WIRELESS SERVICES
Demand for wireless communications has grown rapidly over the past
decade as services have evolved from basic tone-only paging to mass-market
cellular technology services. Each new generation of wireless communication
products and services has generally been characterized by improved product
quality.
As of December 31, 1999, according to the Cellular Telecommunications
Industry Association, there were 86 million wireless telephone subscribers in
the United States, representing an overall wireless penetration rate of 28% and
a subscriber growth rate of 24% from the prior year. We believe that this growth
will continue, and that PCS will gain an increasing share of it due to shrinking
service costs, greater service offerings and increased awareness of the
productivity, convenience and privacy PCS offers. Moreover, PCS providers are
the first direct wireless competitors of cellular providers to offer all-digital
mobile networks. We also believe that the rapid growth of notebook computers and
personal digital assistants, combined with emerging software applications for
delivery of electronic mail, fax and database searching, will contribute to the
overall growing demand for wireless services.
PCS is a term commonly used in the U.S. to describe a portion of radio
spectrum from 1850 to 1990 MHz. This portion of radio spectrum is to be used by
PCS licensees to provide wireless communications services. PCS spectrum was
auctioned by the FCC in six frequency blocks, beginning with the A and B-Blocks
in late 1994 and 1995. In late 1995 and in 1996, the FCC auctioned C-Block
licenses and concluded simultaneous auctions of the D, E and F-Blocks in 1997.
In 1999, the FCC re-auctioned portions of the C, D, E and F-Blocks that were
returned or not purchased in previous auctions.
The FCC has announced plans to hold another reauction of C and F-Block
licenses in December 2000. In response to the requests of a number of large
carriers, including SBC Communications, Nextel Communications, BellSouth
Corporation, Verizon Wireless, and AT&T Wireless, the FCC has subdivided the
C-Block licenses slated for reauction into three 10MHz licenses. For this
reauction, the FCC also subdivided the basic trading service areas to which
Entrepreneurs' Block eligibility restrictions would continue to apply into two
tiers according to
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population. In so-called "Tier 1" basic trading areas, service areas with a
population equal to or greater than 2.5 million, the FCC has removed all
eligibility restrictions on two of the newly created 10MHz C-Block licenses, and
will sell them in open bidding to any entity that purchases them, no matter how
large. In these Tier 1 basic trading areas, one 10 MHz C-Block license will
remain subject to a closed bidding process, such that only entities meeting
Entrepreneurs' Block eligibility requirements will be permitted to bid. In Tier
2 basic trading service areas with a population less than 2.5 million, two of
the 10 MHz C-Block licenses will remain subject to C and F-block eligibility
rules and thus reserved for closed bidding by designated entities, while one 10
MHz C-Block license will be sold at open bidding. Several 15 MHz C Block
licenses and number of F-Block licenses slated for reauction also will be sold
at open bidding, such that previous C and F-Block eligibility requirements will
no longer apply.
LIMITATIONS OF CELLULAR TELEPHONE INDUSTRY AND THE PCS SOLUTION
Despite its widespread availability and growth to date, analog cellular
services have several limitations, including inconsistent service quality, lack
of privacy, limited capacity, and currently, the inability to transfer data
without a modem. Most current cellular services transmit voice and data signals
over analog-based systems, which use one continuous electronic signal that
varies in amplitude or frequency over a single radio channel accommodating one
conversion. In contrast, digital networks, including PCS networks, convert voice
or data signals into a stream of digits and typically use voice compression
techniques to allow a single radio channel to carry multiple simultaneous signal
transmissions. This enhanced capacity, along with improvements in digital
protocols, allows PCS and other digital wireless technologies to offer greater
call privacy and single number service, along with more robust data transmission
features.
We believe that due to the relatively high per minute airtime charges
and unpredictable monthly bills, there is a price-sensitive mass consumer market
that refrains from subscribing to or extensively using cellular services. We
believe that if the mass consumer market were offered significantly lower per
minute airtime charges and more predicable and affordable pricing plans, mass
consumers would increase their use of wireless communications services. We also
believe that business customers who are high-volume users of wireless
communications will be attracted to lower priced airtime service, as they would
realize substantial aggregate savings. We believe that PCS operators have the
opportunity to capture a substantial share of the predicted growth of wireless
communications due to technical and other advantages over incumbent cellular
operators, including greater flexibility to reduce per minute airtime usage
charges, increased network capacity, enhanced voice quality; and the ability to
include enhanced capabilities such as advanced calling features, data
transmissions to and from portable computers, and short messaging and facsimile
services without the need for a modem.
We base our confidence in the future of PCS on the fact that when PCS
was first introduced in Washington, D.C. in late 1995, approximately 90,000
customers subscribed for it in its first seven months of commercial
availability, even though the service had no roaming capacity and offered a much
smaller geographic coverage area than existing cellular competitors. Moreover,
in approximately three years, PCS operators in the United Kingdom have gained
over 1.1 million subscribers and in Japan, approximately 600,000 new PCS
subscriptions were activated during the first year of operations.
DIGITAL TECHNOLOGY SELECTION
PCS service areas are divided into multiple regions called "cells,"
each of which contains a base station consisting of a low-power transmitter, a
receiver and signaling equipment. These cells are typically configured on a grid
in a honeycomb-like pattern, although physical obstructions and signal coverage
patterns may result in irregularly shaped cells, overlaps, or gaps in coverage.
The base station in each cell is connected to a base station controller, and
each base station controller is connected to a switching office by microwave,
fiber optic cable, telephone wires or a hard-wired interface. The switching
office controls the operation of the wireless telephone networks for its entire
service area, performing inter-base station hand-offs, managing call delivery to
handsets, allocating calls among the cells within the networks and connecting
calls to and from the local landline telephone system or to a long distance
telephone carrier. Wireless service providers have interconnection agreements
with various local exchange carriers and long distance carriers, thereby
integrating wireless telephone networks with landline telecommunications
systems. Because two-way wireless networks are fully interconnected with
landline
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telephone networks and long distance networks, subscribers can receive and
originate both local and long distance calls from their wireless telephones.
The signal strength of a transmission between a handset and a base
station declines as the handset moves away from the base station, so the
switching office and the base stations monitor the signal strength of calls in
progress. In an analog system, when the signal strength of a call declines to a
predetermined level, the switching office may "hand off" the call to another
base station that establishes a stronger signal within the handset. If a handset
leaves the service area of the wireless service provider, the call is
disconnected unless an appropriate technical interface is available to hand off
the call to an adjacent system.
There are different radio air-interface standards established in the
United States for the provision of PCS to multiple users over the allocated
spectrum. The primary methods of digital wireless communications widely accepted
by the wireless industry are based on TDMA and CDMA. These multiple access
techniques provide for communications over the radio channel either by dividing
it into distinct time slots and transmitting user-specific data in each time
slot (a method known as TDMA), or by assigning specific codes to each packet of
user data that in conjunction with many other users' data comprise a signal (a
method known as CDMA). While the FCC has mandated that licensed cellular
networks in the U.S. utilize compatible analog signaling protocols, the FCC has
intentionally avoided mandating a universal digital signaling protocol for PCS.
Three principal competing, incompatible digital wireless standards have been
introduced by various vendors for use in PCS Networks: CDMA, GSM and TDMA. An
older version of TDMA developed in Europe, GSM, constitutes the oldest and most
extensive PCS technology in international markets. TDMA is offered by cellular
providers in certain U.S. cities. CDMA is currently being deployed by a number
of cellular and PCS providers in the U.S., and also has been implemented on a
commercial basis in Hong Kong and South Korea.
Because these protocols are currently incompatible with each other, and
with analog cellular, a subscriber utilizing a GSM handset, for example, will be
unable to use his handset when traveling in an area covered only by a CDMA or
TDMA based network unless he carries a dual-mode/dual-band handset that permits
the subscriber to use the analog cellular networks in that area. For this
reason, the success of each protocol may depend both on its ability to offer
quality wireless service and on the extent to which its users will be able to
use their handsets when roaming outside their service area.
COMPETITION
The wireless communications market in the United States is expected to
become even more competitive. Cellular operators and other wireless services
providers are already exploiting existing wireless technology and have
established and continue to augment wireless telecommunications networks that
will directly compete with many of the services that would be offered by us.
Additionally, other PCS operators are expected to compete in our markets. If we
build out our networks, our success will depend largely upon our ability to
satisfy the mass consumer and business markets, which we believe have not been
adequately served by existing cellular service operators. If we develop our
licenses, we would have to compete with cellular and other PCS operators on the
basis of affordable pricing, predictable monthly bills, and voice transmission
quality.
CELLULAR OPERATORS. If we develop our licenses, we would have to
compete with established cellular telephone service operators in the markets we
intend to enter. Principal cellular providers in our markets are Price Comm., US
Cellular, AT&T, and Alltel. Under FCC rules, cellular telephone service
licensees historically have enjoyed a duopoly because the FCC only permits two
cellular licensees in each market. Cellular licensees to date have faced limited
competition from businesses that "resell" cellular telephone service to
customers, but we could also face additional competition from resellers of
cellular and PCS networks.
The introduction of digital transmission technologies to supplant
traditional analog cellular systems is increasing the capacity and quality of
existing cellular telephone systems once deployed. However, we believe that
upgrading from analog to digital is expensive, and that it will likely be
several years before cellular networks are fully converted to digital
technology. We expect the analog infrastructure to continue being used in the
foreseeable future due in part to a lack of a national digital technology
standard. Cellular licensees have acquired PCS spectrum in the D and E Blocks.
These acquisitions provide the cellular operators with greater capacity, and
could allow
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them to add additional customers and offer more advanced services in their
markets. We believe that by providing low-priced services and new wireless
features on our digital PCS networks, we would be competitive with cellular
services.
OTHER PCS OPERATORS. If we develop our licenses, we would compete with
A, B, D, E, and F-Block PCS licensees, many of whom are cellular-affiliated
companies that will utilize PCS spectrum in new markets to expand their national
or regional coverage, as well as with the 15 MHz C-Block licenses that we
surrendered in 1998, which were regranted in 1999. Principal licensees in our
markets are Powertel Ltd., Ariel Co., PCS PrimCo, ABC W., BellSouth, Sprint PCS,
Mercury and Nextwave. These competitors have all had substantial lead-time to
develop their networks, and some of these parties, particularly the A, B, D and
E-Block licensees, have significantly greater financial, technical, marketing
and other resources than us. Although the D, E and F-Block licenses are only for
10 MHz, entities can, subject to the FCC's spectrum cap rules limiting entities
to 45 MHz of cellular, broadband PCS and SMR spectrum (55MHz in certain rural
markets) in a given market, acquire 10 MHz licenses and consolidate them so as
to design a 20 MHz or 30 MHz PCS system which could have more capacity than
ours.
SMR AND "ENHANCED" SMR SERVICES. As a result of advances in digital
technology, some service providers have begun to design and deploy digital
mobile networks, which are referred to as "Enhanced SMR" or "ESMR." ESMR
networks increase the capacity of SMR system frequencies to a level that may be
competitive with analog cellular networks. SMR service providers offer, or plan
to offer, fleet dispatch services, short messaging, data services and
interconnected voice telephony services over wide geographic service areas.
Given similar developments in the deployment of digital technology in the
cellular operators' networks, it is presently unclear whether the quality and
capacity of SMR-based digital mobile networks will be able to compete
effectively with analog and digital cellular and PCS networks. However, Nextel
has begun successfully offering a competitive wireless service based on ESMR.
OTHER COMPETITION. The FCC's general policy in recent years has been to
promote flexible use of the radio spectrum, which has resulted in rules
authorizing a number of additional spectrum-based services that may offer
competitive wireless mobile services. For example, among other actions, the FCC
has
o authorized the use of the 37 and 39 GHz bands for the
provision of fixed and mobile communications services;
o created rules and assigned licenses to permit wireless
communications service providers to provide a broad range of
fixed, mobile, radio location and satellite broadcasting
services;
o created rules and assigned licenses to permit local multipoint
distribution service providers to provide fixed and mobile
broadband services; and
o authorized "wireless cable" providers to use their spectrum to
provide two-way broadband wireless services.
The FCC is expected to continue making new spectrum available, and to allow for
existing allocated spectrum to be developed, in a fashion that will continue to
expand competition in the wireless marketplace. For example, the FCC has
announced a reauction of PCS spectrum to commence in December 2000, and intends
to auction 700 MHz frequencies in the Spring of 2001. The FCC has also modified
its rules to permit the partitioning and disaggregation of broadband PCS
licenses into licenses to serve smaller service areas, and/or use smaller
spectrum blocks. The purpose of the FCC's rule change was to permit existing PCS
licensees and new PCS entrants to have greater flexibility in determining how
much spectrum and geographic area they need or desire in order to provide PCS
service. The FCC's action could also result in A, B, C, D, and/or E-Block PCS
licensees in our PCS markets partitioning or disaggregating their licenses in a
manner that provides us with increased competition. See "Legislation and
Government Regulation."
In addition, as a result of the enactment of the Telecommunications Act
of 1996, regional energy utility companies are expected to enter the wireless
and wireline telecommunications markets by leveraging their significant capital
assets, brand-name value, existing customer base and infrastructure advantages
in their geographical areas of operation. Similarly, the Telecommunications Act
of 1996 also eliminates barriers for cable television system operators to
provide wireline local loop services over their existing wireline
infrastructure. We also would compete with global satellite systems and other
emerging technologies.
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LEGISLATION AND GOVERNMENT REGULATION
As a recipient of licenses acquired through the C-Block Auction, our
ownership structure and operations are and will be subject to substantial FCC
regulation.
OVERVIEW
FCC AUTHORITY. The Communications Act of 1934, as amended (the
"Communications Act"), grants the FCC the authority to regulate the licensing
and operation of all non-federal government radio-based services in the United
States. The scope of the FCC's authority includes:
o allocating radio frequencies, or spectrum, for specific
services,
o establishing qualifications for applicants seeking authority
to operate such services, including PCS applicants,
o approving initial licenses, modifications thereto, license
renewals, and the transfer or assignment of such licenses,
o promulgating and enforcing rules and policies that govern the
operation of spectrum licenses,
o the technical operation of wireless services, interconnection
responsibilities between and among PCS, other wireless
services such as cellular, and landline carriers, and
o imposing fines and forfeitures for any violations of those
rules and regulations.
Under its broad oversight authority with respect to market entry and the
promotion of a competitive marketplace for wireless providers, the FCC regularly
conducts rulemaking and adjudicatory proceedings to determine and enforce rules
and policies potentially affecting broadband PCS operations.
REGULATORY PARITY. The FCC has adopted rules designed to create
symmetry in the way it and the states regulate similar types of mobile service
providers. According to these rules, all "commercial mobile radio service"
("CMRS") providers that provide substantially similar services will be subject
to similar regulation. A CMRS service is one in which the mobile radio service
is provided for a profit, interconnected to the public switched telephone
networks, and made available to the public. Under these rules, providers of PCS,
SMR, and ESMR services are subject to regulations similar to those governing
cellular carriers if they offer an interconnected commercial mobile service. The
FCC announced that it would not apply several regulations to these services,
including its rules concerning the filing of tariffs for the provision of
interstate services. Congress specifically authorized the FCC to delay applying
such regulation in the Omnibus Budget Reconciliation Act of 1993. With respect
to PCS, the FCC has stated its intent to continue monitoring competition in the
PCS service marketplace. The FCC also concluded that Congress intended to
preempt state and local regulation of all CMRS providers, including PCS, but
established procedures for state and local governments to petition the FCC for
authority to continue or initiate rate and entry regulation.
BUILD OUT REQUIREMENTS. Each of our PCS licenses is subject to an FCC
mandate that we construct PCS networks that provide adequate service to at least
one-quarter of the population in the related PCS market within five years of the
date when the license was granted, or make a showing of substantial service in a
licensed area within five years of the license grant date. As our licenses were
granted to us on September 17, 1996, we must satisfy this build out requirement
by September 17, 2001, unless we can obtain a waiver or extension from the FCC.
We are unable to predict whether this required coverage will be achieved in
accordance with FCC requirements, and the prospect of our being able to obtain a
waiver or extension is highly uncertain. Any failure to comply could cause the
revocation of our PCS licenses or the imposition of fines and/or other sanctions
by the FCC.
CMRS SPECTRUM OWNERSHIP LIMIT. Under the FCC's current rules specifying
spectrum aggregation limits affecting broadband PCS and cellular licensees, no
entity may hold attributable interests, generally 20% or more of the equity of,
or an officer or director position with, the licensee, in licenses for more than
45 MHz of PCS, cellular and certain specialized mobile radio services where
there is significant overlap, except in rural areas. In rural areas, up to 55
MHz of spectrum may be held. Passive investors may hold up to a 40% interest.
Significant overlap will occur when at least 10% of the population of the PCS
licenses service area is within the cellular and/or specialized
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mobile radio service areas(s). Our ability to raise capital from entities with
attributable broadband CMRS interests in certain geographic areas is likely to
be limited by this restriction.
OTHER FCC REQUIREMENTS. The FCC has adopted rules that prohibit
broadband PCS, cellular and certain SMR licensees from unreasonably restricting
the resale of their services. The FCC has determined that the reselling of
licenses will increase competition at a fast pace. This prohibition will expire
on November 4, 2002. Additionally, the FCC requires such carriers to provide
manual roaming service to subscribers of other carriers, through which traveling
subscribers of other carriers may make calls after establishing a method of
payment with the host carrier.
The FCC has revised its rule to permit CMRS operators, including PCS
licensees, to use their assigned spectrum to provide fixed local loop and other
services on a co-primary basis with mobile services. The FCC is continuing its
rulemaking proceeding, to determine the extent to which such fixed services fall
within the scope of CMRS regulation.
The FCC has adopted requirements for CMRS providers to implement
various enhanced 911 capabilities between April 1998 and October 2001. FCC rules
also require CMRS providers to meet several number portability requirements,
including enabling calls from their networks to be delivered to ported wireline
numbers. CMRS providers must offer long-term service provider number portability
in the 100 largest major trading areas, including the ability to support
nationwide roaming, by November 24, 2002.
In addition, the Communications Assistance for Law Enforcement Act of
1994 ("CALEA") requires all telecommunications carriers, including wireless
carriers, as of June 30, 2000, to ensure that their equipment is capable of
permitting the government, pursuant to a court order or other lawful
authorization, to intercept any wire and electronic communications carried by
the carrier to or from its subscribers, and to access certain cell-identifying
information that is reasonably available to carriers. Compliance with the
requirements of CALEA could impose significant additional direct and/or indirect
costs on us and other wireless carriers.
The FCC has adopted new guidelines and methods for evaluating the
effects of radio frequency emissions from transmitters including PCS mobile
telephones and base stations. The guidelines, which are generally more stringent
than previous requirements, were effective immediately for hand-held devices and
otherwise became effective January 1, 1997.
OTHER FEDERAL REGULATIONS. Wireless networks are subject to certain
Federal Aviation Administration and FCC guidelines regarding the location,
lighting, and construction of transmitter towers and antennas. In addition, the
FCC has authority to enforce certain provisions of the National Environmental
Policy Act as they would apply to our facilities. If we develop our licenses, we
intend to use common carrier point-to-point microwave and traditional landline
facilities to connect base station sites and to link them to their respective
main switching offices. Although the FCC has proposed to auction certain such
licenses, these microwave facilities have historically been separately licensed
by the FCC on a first-come, first-served basis, and are subject to specific
service rules.
Wireless providers also must satisfy a variety of FCC requirements
relating to technical and reporting matters. One such requirement is the
coordination of proposed frequency usage with adjacent wireless users,
permittees, and licensees in order to avoid electrical interference between
adjacent networks. In addition, the height and power of base station
transmitting facilities, and the type of signals they emit, must fall within
specified parameters.
STATE AND LOCAL REGULATION. State regulations currently cover such
matters as the terms and conditions of interconnection between local exchange
carriers and wireless carriers under FCC oversight, customer billing information
and practices, billing disputes, other consumer protection matters, certain
facilities construction issues, transfers of control, and the bundling of
services and equipment and requirements relating to making capacity available to
third party carriers on a wholesale basis. In these areas, particularly the
terms and conditions of interconnection between local exchange carriers and
wireless providers, the FCC and state regulatory authorities share regulatory
responsibilities with respect to interstate and intrastate issues.
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The FCC and a number of state regulatory authorities have initiated
proceedings, or indicated their intention to examine access charge obligations,
mutual compensation arrangements for interconnections between local exchange
carriers and wireless providers, the implementation of "number portability"
rules to permit telephone customers to retain their telephone numbers when they
change telephone service providers, and alterations in the structure of
universal service funding, among other matters.
Proceedings with respect to the foregoing policy issues before the FCC
and state regulatory authorities could have a significant impact on the
competitive market structure among wireless providers and the relationships
between wireless providers and other carriers.
GENERAL PCS REGULATIONS
In June 1994, the FCC allocated spectrum for broadband PCS services
from 1850 to 1900 MHz bands. Of the 140 MHz available for PCS services, the FCC
created six separate blocks of spectrum identified as the A, B, C, D, E and
F-Blocks. The A, B and C-Blocks were each allocated 30 MHz of spectrum, the D, E
and F-Blocks were allocated 10 MHz each. For each block, the FCC adopted a
10-year PCS license term with an opportunity to renew after its expiration.
Twenty MHz of spectrum within the PCS band was reserved for unlicensed use.
The FCC adopted a "rebuttable presumption" that all PCS licensees are
common carriers, subject to Title II of the Communications Act. Accordingly,
each PCS licensee deemed to be a common carrier must provide services upon
reasonable request, and the rates, terms and conditions of such service must not
be unreasonably discriminatory.
STRUCTURE OF PCS BLOCK ALLOCATIONS. The FCC defines the geographic
contours of the licenses within each PCS block based on the major trading areas
and basic trading areas developed by Rand McNally & Co. The FCC awarded A and
B-Block licenses in 51 major trading areas. The C, D, E and F-Block spectrum
were allocated on the basis of 493 smaller basic trading areas. In addition,
there are spectrum aggregation caps on PCS licensees limiting them to 45 MHz (55
MHz in rural areas) of broadband CMRS spectrum in any given market.
All but three of the 102 total A-Block licenses and all B-Block
licenses were auctioned in 1995. The three remaining A-Block licenses were
awarded separately pursuant to the FCC's "Pioneer's Preference" program. The C
and F-Block spectrums are reserved for Entrepreneurs. See "C-Block License
Requirements." The FCC completed its auction for C-Block licensees in May, 1996
and reallocated 18 C-Block licenses on which initial auction winners defaulted
in a re-auction that ended in July 1996. The FCC completed its auction for the
D, E, and F-Block licenses in January 1997. Another reauction of PCS licenses is
scheduled for December 2000.
In December 1996, the FCC adopted rules permitting broadband PCS
carriers to partition any service areas within their license areas and/or
disaggregate any amount of spectrum within their spectrum blocks to entities
that meet the eligibility requirements for the spectrum blocks. The purpose of
the FCC's rule change was to permit existing PCS licensees and new PCS entrants
to have greater flexibility to determine how much spectrum and geographic area
they need or desire. Thus, A, B, D, and E-Block licensees may sell or lease
partitioned or disaggregated portions of their licenses at any time to entities
that meet the minimum eligibility requirements of the Communications Act.
C-Block licensees, such as us, may only sell or lease partitioned or
disaggregated portions of our licenses to other qualified entrepreneurs during
the first five years of our license terms, or pursuant to recent changes in FCC
rules, to a non-Entrepreneur if the license's five year construction deadline
has been met. Thereafter, if we sell, partition or disaggregate to
non-Entrepreneurs, we may need to repay to the FCC a proportional share of any
bidding credits that we received.
TELECOMMUNICATIONS ACT OF 1996
On February 8, 1996, the Telecommunications Act of 1996 (the "1996
Act") was enacted, which effectively overhauled the Communications Act, to
increase competition. In particular, the 1996 Act substantially amended Title II
of the Communications Act, which governs telecommunications common carriers.
Most importantly, the 1996 Act eliminates all state and local barriers to
competition and preempts all inconsistent state and local laws. The 1996 Act
also requires incumbent wireline local exchange carriers to open their networks
to
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competition through interconnection and access to unbundled network elements,
and it prohibits state and local barriers to the provision of interstate and
intrastate telecommunications services. The only areas where the states retain
jurisdiction under the 1996 Act is in adopting laws necessary to preserve
universal service, to protect public safety and welfare, to ensure the continued
quality of telecommunications services, and to safeguard the rights of
consumers. Implementation of the provisions of the 1996 Act will be the task of
the FCC, state public utility commissions and a joint federal-state board.
Some specific provisions of the 1996 Act that affect wireless providers
are summarized below:
EXPANDED INTERCONNECTION OBLIGATIONS: The 1996 Act established a
general duty of all telecommunications carriers, including C-Block PCS
licensees, to interconnect with other carriers, directly or indirectly. The 1996
Act also contains a detailed list of requirements regarding the interconnection
obligations of local exchange carriers. These "interconnect" obligations include
resale, number portability, dialing parity, access to rights-of-way and
reciprocal compensation.
Local exchange carriers that were providing landline local exchange
telephone service at the time the 1996 Act was adopted have additional
obligations including to:
o negotiate in good faith;
o interconnect on terms that are reasonable and
non-discriminatory at any technically feasible point at
cost-based rates, plus a reasonable profit;
o provide non-discriminatory access to facilities and network
elements on an unbundled basis;
o offer for resale at wholesale rates any service that local
exchange carriers provide on a retail basis; and
o provide actual co-location of equipment necessary for
interconnection or access.
The 1996 Act establishes a framework for state commissions to mediate
and arbitrate negotiations between incumbent local exchange carriers, and
carriers requesting interconnection services or network elements. The 1996 Act
establishes deadlines, policy guidelines for state commission decision making,
and federal preemption if a state commission fails to act.
REVIEW OF UNIVERSAL SERVICE REQUIREMENTS. The 1996 Act contemplates
that interstate telecommunications providers, including CMRS providers, will
"make an equitable and non-discriminatory contribution" to support the cost of
providing universal service. Telecommunications providers are to base their
contributions on end user interstate revenues, and for certain programs,
intrastate end-user revenues.
PROHIBITION AGAINST SUBSIDIZED TELEMESSAGING SERVICES. The 1996 Act
prohibits incumbent local exchange carriers from subsidizing their own
telemessaging services (i.e., voice mail, voice storage/retrieval, live operator
services and related ancillary services) and from discriminating in favor of its
own telemessaging operations.
CONDITIONS ON RBOC PROVISION OF IN-REGION INTERLATA SERVICES. The 1996
Act generally requires that before engaging in landline long distance services
in the states in which they provide landline local exchange service referred to
as in-region interLATA services, the Regional Bell Operating Companies ("RBOCs")
must:
o provide access and interconnection to one or more unaffiliated
competing facilities-based providers of telephone exchange
service, or after 10 months following the enactment of the
1996 Act, no such provider shall have requested such access
more than three months before the RBOCs have applied for
authority, and
o demonstrate to the FCC their satisfaction of the 1996 Act's
"competitive checklist."
The specific interconnection requirements contained in the competitive
checklist, which the RBOCs must offer on a non-discriminatory basis, include
interconnection and unbundled access; access to poles, ducts, conduits and
rights-of-way owned or controlled by the RBOCs; unbundled local loops, unbundled
transport and unbundled switching; access to emergency 911 services, directory
assistance, operator call completion and white pages; access
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to telephone numbers, databases and signaling for call routing and completion;
number portability; local dialing parity; reciprocal compensation; and resale.
The 1996 Act eliminates the previous prohibition on RBOC provision of
out-of-region, interLATA services and all interLATA services associated with the
provision of CMRS service, including in-region CMRS service.
RBOC COMMERCIAL MOBILE JOINT MARKETING. The RBOCs are permitted to
market jointly and sell wireless services in conjunction with telephone exchange
service, exchange access, and interLATA telecommunications and information
services.
CMRS FACILITIES SITING. The 1996 Act limits the rights of states and
localities to regulate placement of CMRS facilities so as to "prohibit" or
effectively prohibit the provision of wireless services, or to "discriminate"
among providers of such services. The 1996 Act also eliminates environmental
effects from radio frequency emissions, provided the wireless system complies
with FCC rules, as a basis for states and localities to regulate the placement,
construction, or operation of wireless facilities. The FCC's implementation of
these provisions, and the scope thereof, have neither been adopted by the agency
nor reviewed by the courts.
EQUAL ACCESS. The 1996 Act provides that wireless providers are not
required to provide equal access to common carriers for toll services. The FCC
is authorized to require unblocked access subject to certain conditions.
DEREGULATION. The FCC is required to forebear from applying any
statutory or regulatory provision that is not necessary to keep
telecommunications rates and terms reasonable to protect consumers. A state may
not apply a statutory or regulatory provision that the FCC decides not to apply.
In addition, the FCC must review its telecommunications regulations every two
years and change any that are no longer necessary.
FCC INTERCONNECTION PROCEEDINGS
In August 1996, the FCC adopted rules to implement the interconnection
provisions of the 1996 Act. In this interconnection order, the FCC determined
that CMRS-to-CMRS interconnection may be accomplished indirectly through the
interconnection to each CMRS provider of an incumbent local exchange carriers'
network. The FCC determined that local exchange carriers are required to enter
into reciprocal compensation arrangements with all CMRS providers for the
transport and termination of local exchange carriers-originated traffic.
Additionally, the FCC established default "proxy" rates for reciprocal
compensation, interconnection, and unbundled network elements to be used unless
or until a state develops rates for these items based on the Total Element Long
Run Incremental Cost ("TELRIC"). The Proxy rates for CMRS-to local exchange
carriers interconnection would result in significant savings when compared with
rates that CMRS providers, principally cellular carriers, have been paying to
local exchange carriers.
In July 1997, the U.S. Court of Appeals for the Eighth Circuit, acting
on consolidated petitions for review of the FCC's interconnection order, vacated
the rate-related portions of the order. The court found that the FCC had no
jurisdiction to establish pricing regulations regarding intrastate telephone
service. On January 25, 1999, the Supreme Court reversed the Eighth Circuit's
ruling, and held, among other things, that the FCC has general jurisdiction to
implement the local competition provisions of the 1996 Act. Although the Supreme
Court affirmed the FCC's authority to develop pricing guidelines, it did not
evaluate the FCC's TELRIC methodology. It is not possible at this time to
determine the final outcome of the judicial or FCC remand proceedings, or the
effect that such proceedings will have on us or on CMRS providers generally.
RELOCATION OF INCUMBENT FIXED MICROWAVE LICENSEES
In an effort to balance the competing interests of existing microwave
users and newly authorized PCS licensees in the spectrum allocated for PCS use,
the FCC has adopted a transaction plan to relocate fixed microwave operators
that currently are operating in the PCS spectrum, and a cost sharing plan so
that if the relocation of an incumbent benefits more than one PCS licensee, the
benefitting PCS licensees will help defray the costs of
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relocation. PCS licensees will only be required to relocate fixed microwave
incumbents if they cannot share the same spectrum, and they will be responsible
for their costs to relocate to alternate spectrum locations.
Relocation generally involves a PCS operator compensating an incumbent
for costs associated with system modifications and new equipment required to
move to an alternate, readily available spectrum. This transition plan allows
most microwave users to operate in the PCS spectrum for a two-year voluntary
negotiation period and an additional one-year mandatory negotiation period. For
public safety entities dedicating a majority of their system communications for
police, fire, or emergency medical service operations, the voluntary negotiation
period is three years. The FCC currently is considering whether to shorten the
voluntary negotiation period by one year. Parties unable to reach an agreement
within these time periods may refer the matter to the FCC for resolution, but
the existing microwave user is permitted to continue its operations until final
FCC resolution of the matter.
The FCC's cost-sharing plan allows PCS licensees that relocate fixed
microwave links outside of their license areas to receive reimbursements from
later-entrant PCS licensees that benefit from the clearing of their spectrum. A
non-profit clearinghouse will be established to administer the FCC's
cost-sharing plan.
C-BLOCK LICENSE REQUIREMENTS
When the FCC allocated spectrum to PCS, it designated the C-Block as an
"Entrepreneurs' Block." FCC rules require C-Block Entrepreneurs to meet
qualifications such as:
o various structural requirements concerning equity in
investments, including the Entrepreneurs' Requirements, Small
Business Requirements and Control Group Requirements, all of
which apply specifically to Entrepreneurs, and the Foreign
Ownership Limitations, which apply to most communications
entities governed by the FCC;
o transfer restrictions limiting, among other things, the sale
of C-Block licenses; and
o other ongoing requirements that mandate network build out
schedules and limit cross-ownership of cellular and other
wireless investments.
In order to ensure continued compliance with the FCC rules, the FCC has
announced its intention to conduct random audits during the initial 10-year PCS
license terms. There can be no assurance that we are or will continue to satisfy
any of the FCC's qualifications or requirements, and the failure to do so would
have a material adverse effect.
STRUCTURAL REQUIREMENTS
ENTREPRENEURS' REQUIREMENTS. In order to hold an Entrepreneur's C-Block
license, an entity must meet the Entrepreneurs' Revenues Limit by having less
than $125 million in gross revenues and meet the Entrepreneurs' Asset Limit by
having less than $500 million in total assets, excluding the value of C-Block
licenses. To qualify for the C-Block auction, an entity had to have met the
Entrepreneurs' Revenues Limit for each of the two years prior to the auction and
the Entrepreneurs' Asset Limit at the time it filed its Short Form. For at least
five years after winning a C-Block license, a licensee must continue to meet the
Entrepreneurs' Requirements, which are modified for such five-year periods to
exclude certain assets and revenues from being counted toward the Entrepreneurs'
Asset Limit and the Entrepreneurs' Revenues Limit. Additional amounts are
excluded if the licensee maintains an organizational structure that satisfies
the Control Group Requirements described below. In calculating a licensee's
gross revenues for purposes of the Entrepreneurs' Requirements, the FCC includes
the gross revenues of the licensee's affiliates, those persons or entities that
hold an interest in the licensee, and the affiliates of such persons or
entities.
By claiming status as an Entrepreneur, we qualified to enter the
C-Block auction. If the FCC were to determine that we did not satisfy the
Entrepreneurs' Requirements at the time we participated in the C-Block auction,
or that we fail to meet the ongoing Entrepreneurs' Requirements, the FCC could
revoke our PCS license, fine us, or take other enforcement actions including
imposing unjust enrichment penalties. Although we believe we have met the
Entrepreneurs' Requirements, there can be no assurance that we are or will
continue to meet such
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requirements or that if we fail to continue to meet such requirement, the FCC
will not take action against us such as revoking our PCS licenses.
SMALL BUSINESS REQUIREMENTS. An entity that meets the Entrepreneurs'
Requirements may also qualify for a 25% bidding credit if it meets the Small
Business Requirements. To meet the Small Business Requirements, a licensee must
have had annual average gross revenues of not more than $40 million for the
three calendar years preceding the date it filed its Short Form. In calculating
a licensee's gross revenues for purposes of the Small Business Requirements, the
FCC includes the gross revenues of the licensee's affiliates, those persons or
entities that hold an interest in the licensee, and the affiliates of such
person or entities.
By claiming status as a Small Business, we qualified for the bidding
credit. If the FCC were to determine that we do not qualify as a Small Business,
we would, at a minimum, be forced to repay the portion of the bidding credit to
which we were not entitled. Further, the FCC could revoke our PCS licenses, fine
us, or take other enforcement actions including imposing unjust enrichment
penalties. Although we have structured ourselves to meet the Small Business
Requirements, there can be no assurance that we are or will remain in compliance
with those requirements, or that if we fail to continue to meet such
requirements, the FCC will not take action against us such as revoking our PCS
licenses.
CONTROL GROUP REQUIREMENTS. If a C-Block licensee meets the Control
Group Requirements, the FCC excludes certain assets and revenues from its total
revenue and assets, making it easier for the licensee to meet the Entrepreneurs'
Requirements and the Small Business Requirements. The Control Group Requirements
mandate that the Control Group, among other things, have both actual and legal
control of the licensee. Until August 2000, the FCC required licensees to
qualify under the Control Group Requirements pursuant to the Qualifying Investor
Option if its Control Group is comprised of the following:
o Qualifying investors that own at least 15% of the equity
interest on a fully diluted basis and 50.1% of the voting
power in the C-Block licensee, and
o Additional Control Group Members that hold at least 10% of the
equity interest in the C-Block licensee. Additional Control
Group Members must be either the same Qualifying Investors in
the Control Group, members of the licensee's management or
non-controlling institutional investors, including venture
capital firms.
To take advantage of the FCC's Qualifying Investor Option, a C-Block licensee
must have met the Qualifying Investor Option requirements at the time it filed
its Short Form and must continue to meet the Qualifying Investor Option
requirements for three years following the License Grant Date. Commencing the
fourth year of the license term, the FCC rules eliminate the requirement that
the Additional Control Group Members hold any of the licensee's equity interest
and allow the licensee to reduce the minimum required equity interest held by
the Control Group's Qualifying Investors from 15% to 10%.
In August 2000, the FCC amended its Control Group requirements to
eliminate specific equity requirements, provided the entity's controlling
interest holders exercise both legal and actual control of the licensee;
however, the amount or the percentage of equity investment may still be used as
an indicium of control.
In order to meet the Control Group Requirements, our Certificate of
Incorporation provides that our Class B common stock, as a class, must
constitute 50.1% of our voting power. See "Description of Capital Stock." There
can be no assurance that we are or will remain in compliance with the Control
Group Requirements or, if we fail to continue to meet such requirements, that
the FCC will not take action against us, which could include revocation of our
PCS licenses.
ASSET AND REVENUE CALCULATION. In determining whether an entity
qualifies as an Entrepreneur and/or as a Small Business, the FCC counts the
gross revenues and total assets of the entity's "affiliates" toward the entity's
total gross revenues and total assets. Such affiliation can arise from common
investments, familial or spousal relationships, contractual relationships,
voting trusts, joint venture agreements, stock ownership, stock options,
convertible debentures, and agreements to merge. Affiliates of noncontrolling
investors with ownership interests that do not exceed the applicable FCC
"passive" investor ownership thresholds are not attributed to C-Block
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licensees for purposes of determining whether such licensees financially qualify
for the applicable C-Block auction preferences. The Entrepreneurs' Requirements
and the Small Business Requirements provide that, to qualify as a passive
investor, an entity may not own more than 25% of our total equity on a fully
diluted basis, unless the Control Group owns at least 50.1% of our total equity
on a fully diluted basis. There can be no assurance that we will not exceed
these passive investor limits or otherwise violate the Entrepreneur Requirements
and/or the Small Business Requirements.
In addition, if an entity makes bona fide loans to a C-Block licensee,
the assets and revenues of the creditor would not be attributed to the licensee
unless the creditor is deemed an affiliate of the licensee, or the loan is
treated by the FCC as an equity investment and such treatment would cause the
creditor/investor to exceed the applicable ownership interest threshold for
purposes of both the financial affiliation and foreign ownership rules. Although
the FCC permits a creditor/investor to use standard terms to protect its
investments in C-Block licensees such as covenants, rights of first refusal, and
super-majority voting rights on specified issues, the FCC has stated that it
will be guided, but not bound, by criteria used by the Internal Revenue Service
to determine whether a debt investment is bona fide debt. The FCC's application
of its financial affiliation rules is largely untested, and there can be no
assurance that the FCC or the courts will not treat certain of our lenders or
investors as financial affiliates.
FOREIGN OWNERSHIP LIMITATIONS. The Communications Act requires that
non-U.S. citizens, their representatives, foreign governments, or corporations
otherwise subject to domination and control by non-U.S. citizens may not own of
record or vote more than 20% of the capital contribution to a common carrier
radio station directly, or more than 25% of the capital contribution to the
parent corporation of a common carrier radio station licensee if the FCC
determines such holdings are not within the public interest. Because the FCC
classifies PCS as common carrier offering, PCS licensees are subject to the
foreign ownership limits. Congress recently eliminated restrictions on non-U.S.
citizens serving as members on the board of directors and officers of a common
carrier radio licensee or its parent. The FCC also has adopted rules that,
subject to a public interest finding by the FCC, could allow additional indirect
foreign ownership of CMRS companies to the extent that the relevant foreign
states extend reciprocal treatment to U.S. investors. We believe that we are in
compliance with FCC foreign ownership rules. However, if our foreign ownership
were to exceed 25% in the future, the FCC could revoke our PCS licenses or
impose other penalties. Further, our certificate of incorporation enables us to
redeem shares from holders of common stock whose acquisition of such shares
result in a violation of such limitation. The restrictions on foreign ownership
could adversely affect our ability to attract additional equity financing from
entities that are, or are owned by, non-U.S. entities. The recent World Trade
Organization agreement on basic telecommunications services could eliminate or
loosen foreign ownership limitation but could also increase our competition.
Under this agreement, the United States and other members of the World Trade
Organization committed themselves to opening their telecommunications markets to
foreign competition, effective as early as January 1, 1998.
TRANSFER RESTRICTIONS
LICENSE TRANSFER RESTRICTIONS. Until the five year build out
requirements have been met, assignment and transfer of a C-Block license is
prohibited to any entity that fails to satisfy the Entrepreneurs' Requirements.
If such a transfer occurs to an entity that is not an Entrepreneur, but does not
qualify for the same level of bidding credits as the assigning or transferring
licensee, such a sale would be subject to unjust enrichment penalties. After
five years, all such transfers and assignments of the license remain subject to
unjust enrichment penalties, if applicable.
UNJUST ENRICHMENT. Any transfer during the full ten year license term
may require reimbursements to the government of the bidding credits. In
addition, if we wish to make any changes in ownership structure during the
initial license term involving the actual and legal control of Sunshine PCS
Corporation, we must seek FCC approval and may be subject to the same costs and
reimbursement conditions indicated above.
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following sets forth the name, business address, present principal
occupation, employment and material occupations, positions, offices or
employments for the past five years and ages as of October 1, 2000 for
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our executive officers and directors. Members of the board are elected and serve
for one year terms or until their successors are duly elected and shall have
qualified.
Name Age Position
---- --- --------
Karen E. Johnson 41 Class B Director and President(1)
David S. Ahl 53 Class B Director(1)
Robert E. Dolan 48 Class A Director(1) and Assistant Secretary
----------------------
(1) The Class B Directors together have three votes and the Class A
Directors together have two votes. See "Description of Capital Stock -
common stock - Voting Rights."
KAREN E. JOHNSON. Ms. Johnson is an investment professional and
analyst. From 1997 to July 2000, Ms. Johnson served as President of Fortunet
Communications, L.P., our predecessor. Also, since 1996, Ms. Johnson has been a
Fundamental Equity Analyst for M.J. Meehan & Co. From 1986-1995 Ms. Johnson was
a Research Analyst and later a Vice President for Smith Barney, Inc.
DAVID S. AHL. Mr. Ahl is a marketer of start-up entities. Mr. Ahl first
gained experience in this field as a promotional director for Young and Rubicam,
Inc. from 1984-1992. Mr. Ahl co-founded and helped manage Advance Retail
Marketing, a company that markets coupons for supermarkets, from 1992-1994. Mr.
Ahl then served as a general manager of Direct Media, the world's largest
mailing list brokerage and management company, from 1994-1998. After leaving
Direct Media in 1998, Mr. Ahl served as an independent marketing consultant for
GE Capital, AdKnowledge and CatalogCity.com. In 1999, Mr. Ahl became the head of
Client Services for Message Media, an email publishing company.
ROBERT E. DOLAN, Chief Financial Officer of Lynch Interactive
(September 1999 to present), Chief Financial Officer of Lynch Corporation (1993
to January 2000).
COMPENSATION OF DIRECTORS
We do not compensate our directors at the present time, although we may
do so in the future. We indemnify directors pursuant to the Delaware law and may
reimburse them for certain out-of-pocket costs in connection with serving as
directors.
EXECUTIVE COMPENSATION
We have no employees and have paid no employee or executive
compensation, although we may do so in the future.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Under Section 145 of the General Corporation Law of the State of
Delaware, we have broad powers to indemnify our directors and officers against
liabilities they may incur in such capacities, including liabilities under the
Securities Act. Our certificate of incorporation provides our directors and
officers shall be indemnified to the fullest extent permitted by the Delaware
Law.
The Delaware Law provides that a corporation may limit the liability of
each director to the corporation or its stockholders for monetary damages except
for liability:
o for any breach of the director's duty of loyalty to the
corporation or its stockholders,
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o for acts or omissions not in good faith or that involve
intentional misconduct or a knowing violation of law,
o in respect of certain unlawful dividend payments or stock
redemptions or repurchases and
o for any transaction which the director derives an improper
personal benefit.
Our certificate of incorporation provides for the elimination and limitation of
the personal liability of our directors for monetary damages to the fullest
extent permitted by the Delaware Law. In addition, our certificate of
incorporation provides that if the Delaware Law is amended to authorize the
further elimination or limitation of the liability of a director, then the
liability of our directors shall be eliminated or limited to the fullest extent
permitted by the Delaware Law, as so amended. The effect of this provision is to
eliminate our rights and our stockholders' rights, through stockholders'
derivative suits, to recover monetary damages against a director for breach of
the fiduciary duty of care as a director, except in the situations described
above. This provision does not limit or eliminate our rights or our
stockholders' rights to seek non-monetary relief such as an injunction or
recission in the event of a breach of a director's duty of care. Our certificate
of incorporation also provides that we shall, to the full extent permitted by
the Delaware Law, as amended from time to time, indemnify and advance expenses
to each of our currently acting and former directors, officers, employees and
agents.
We have no directors and officers liability insurance at this time.
At present, there is no pending litigation or proceeding involving any
of our directors, officers, employees or agents where indemnification will be
required or permitted.
CERTAIN TRANSACTIONS
Fortunet Communications, L.P., a limited partnership, was formed in
1997. In 1997, Fortunet Communications succeeded to all of the assets and all of
the liabilities of the five partnerships that had won 31 PCS licenses in the
FCC's C-Block auction. After the succession, the 50.1% General Partner of
Fortunet Communications was Fortunet Wireless Communications Corporation, of
which 60% of the stock was owned by Victoria G. Kane. Lynch PCS Corporation, an
indirect subsidiary of Lynch Interactive, was a 49.9% limited partner of
Fortunet Communications. The original partners invested $600,000 in the equity
of the partnerships and Lynch Interactive invested a combined $597,604 as equity
in the partnerships. Lynch Interactive also loaned the five partnerships a
combined $24.9 million, primarily for down payments and to service installment
interest payments on PCS licenses won in the C-Block auction. Fortunet
Communications received back $3.9 million from the FCC in 1999 in connection
with the surrender of 28 of its licenses, which was used to pay down a portion
of the Lynch Interactive loan, reducing the principal to approximately $21
million, excluding interest and commitment fees. On May 4, 2000, Ms. Kane
purchased the remaining 40% of Fortunet Wireless Communications for $600,000,
and gave the selling stockholders the right to repurchase the stock so acquired
through May 4, 2008 for 120% of her purchase price. One of these selling
stockholders was our President, Karen E. Johnson. Under this arrangement, Ms.
Johnson has the right to repurchase up to 4.167% of our outstanding Class B
common stock from Ms. Kane, through May 4, 2008, for 120% of the value Ms. Kane
previously paid for Ms. Johnson's stock on May 4, 2000.
We were incorporated on July 13, 2000, and prior to the effective date
of the spin off, we will succeed to the rights and obligations of Fortunet
Communications. At that time, Fortunet Wireless Communications will receive
2,833,076 shares of our Class B common stock and Lynch Interactive will receive
2,821,766 shares of our Class A common stock, which it will transfer to its
stockholders in the spin off.
As a part of the reorganization creating the Company, Lynch Interactive
will contribute the $63.9 million in indebtedness of Fortunet Communications as
a capital contribution. The remaining indebtedness of Fortunet Communications to
Lynch Interactive will be converted upon the transfer of the interests in
Fortunet Communications to us into $16.1 million principal amount of our
transferable subordinated notes. In addition, Lynch Interactive will make an
additional cash payment of $250,000 in exchange for our preferred stock with a
liquidation preference of $10.0 million, and warrants to purchase 4,300,000
shares of our Class A common stock at $.75 per share. The obligation of Lynch
Interactive to make additional loans to us will then terminate.
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PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding beneficial
ownership of our common stock giving effect to the spin off by each person who
is known by us to own beneficially more than five percent of our common stock,
each of our directors, each executive officer, and all current executive
officers and directors as a group.
<TABLE>
<CAPTION>
Class A Class B Total
Beneficially Beneficially Beneficially
---------------------------- -------------------------------- ------------------------------
Shares Percent Shares Percent Shares Percent
------ ------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Fortunet Wireless - - 2,833,076 100% 2,833,076 50.1%
Communications
Corporation(2)
Victoria G. Kane(2) - - 2,833,076 100% 2,833,076 50.1%
T. Gibbs Kane(1) (2) - - 2,833,076 100% 2,833,076 50.1%
Mario J. Gabelli(1)(3) 649,514 23.0% - - 649,514 11.5%
Robert E. Dolan(4) 470 -(5) - - 470 -(5)
Karen E. Johnson - - -(6) -(6) - -(6)
All Directors and
Executive Officers
as a Group (4 in
total) 470 -(5) - - 470 -(5)
</TABLE>
(1) Excludes warrants to purchase 4,300,000 shares of Class A common stock
at $.75 per share owned by Lynch Interactive. If all warrants were exercised,
Lynch Interactive would own approximately 60.4% of the Class A common stock and
43.2% of the total common stock. The shares owned by Lynch Interactive would
also be deemed to be beneficially owned by Mario J. Gabelli if his current
relationship with Lynch Interactive were to remain as it is today. This would
increase his percentage ownership of the Class A common stock to 69.5% and of
total common stock to 49.7%.
(2) Victoria G. Kane is the sole stockholder of Fortunet Wireless
Communication, and therefore shares owned by Fortunet Wireless Communication are
set forth in the table as beneficially owned by Victoria G. Kane. T. Gibbs Kane
is the husband of Victoria G. Kane, and therefore shares owned by Fortunet
Wireless Corporation are also set forth as owned by T. Gibbs Kane. T. Gibbs Kane
disclaims ownership of the shares. The address of Fortunet Wireless
Communications, Victoria G. Kane and T. Gibbs Kane is 350 Stuyvesant Avenue,
Rye, New York 10580. See "Certain Transactions" for the right of certain persons
to acquire 40% of the shares of Fortunet Wireless Communications owned by Ms.
Kane.
(3) Represents 500,914 shares owned directly by Mr. Gabelli (including
6,924 shares held for the benefit of Mr. Gabelli in the Lynch Corporation 401(k)
Savings Plan), 8,600 shares owned by a charitable foundation of which Mr.
Gabelli is a trustee and 140,000 shares owned by a limited partnership in which
Mr. Gabelli is the general partner and has a 6% interest. Mr. Gabelli disclaims
the ownership of the shares owned by the foundation, and by the partnership
except for his 6% interest therein. The address of Mr. Gabelli is 555 Theodore
Fremd Avenue, Corporate Center at Rye, Rye, New York 10580.
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(4) Includes 70 shares registered in the name of Mr. Dolan's children with
respect to which Mr. Dolan has voting and investment power.
(5) Less than 1%
(6) Under certain circumstances, Karen E. Johnson has the right to purchase
up to 4.167% of our outstanding Class B common stock from Victoria G. Kane
through May 4, 2008. See "Certain Transactions."
DESCRIPTION OF CAPITAL STOCK
GENERAL
We are authorized to issue 29,000,000 shares of common stock, $.0001
par value, and 30,000 shares of preferred stock, $1.00 par value. The following
description of our capital stock does not purport to be complete and is subject
to and qualified in its entirety by our certificate of incorporation and bylaws,
and by the provisions of applicable Delaware Law.
COMMON STOCK
We have two classes of common stock authorized: Class A common stock
and Class B common stock. Our authorized capital stock consists of 20,000,000
shares of Class A common stock and 9,000,000 shares of Class B common stock.
There are 2,821,766 shares of Class A common stock outstanding and held by Lynch
Interactive. Concurrently with the spin off, all 2,821,766 shares will be
transferred to stockholders of Lynch Interactive. There are 2,833,076 shares of
Class B common stock outstanding and held by Fortunet Wireless. The holders of
common stock are entitled to receive ratably such dividends, if any, as may be
declared from time to time by the Board of Directors out of funds legally
available therefore. In the event of our liquidation, dissolution or winding up,
the holders of common stock are entitled to share ratably in all assets
remaining after payment of liabilities, if any, then outstanding.
VOTING RIGHTS
Collectively, the shares of Class A common stock represent not more
than 49.9% of our voting interest, with each share of Class A common stock
issued and outstanding having one vote per share, subject to downward adjustment
if necessary to comply with the 49.9% maximum class vote, on all matters except
the election of directors or as otherwise provided by law. The holders of the
Class A common stock, as a class, will be entitled to elect as many members of
our Board of Directors as are set forth in our bylaws at the time (the "Class A
Directors"), who collectively have two votes.
Collectively, the shares of Class B common stock represent at least
50.1% of our voting interest, with each share of Class B common stock issued and
outstanding having 5 votes per share, subject to upward adjustment if necessary,
to comply with the 50.1% minimum class vote, on all matters except the election
of directors or as otherwise provided by law. With respect to the election of
directors, the Class B common stock, voting together as a class, may elect up to
three members of our Board of Directors (the "Class B Directors"). The Class B
Directors shall collectively have three votes on each matter submitted to a vote
of the Board of Directors.
REDEMPTION BY US
If a holder of Class A common stock acquires additional shares of Class
A common stock, or otherwise is deemed to be the owner of such shares that would
cause us to violate the Entrepreneurs' Requirements or the Foreign Ownership
Restrictions (collectively, "FCC Violations"), we, at our option, may redeem
that number of such shares necessary to eliminate the FCC violation at a
redemption price equal to 75% of the fair market value of such shares where such
holder caused the FCC violation or 100% of the fair market value where the FCC
violation was caused by no fault of the holder.
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TRANSFER RESTRICTION
The Class B common stock cannot be transferred, sold or otherwise
disposed of to any third party, directly or indirectly, except
o to family members, or by will or by operation of the laws of
descent and devise, in which case the transferees will
continue to be bound by these restrictions,
o such number of shares which does not exceed 10% of the Class B
common stock outstanding as of the spin off, or
o pursuant to a transaction or series of transactions on terms
and conditions which are substantially identical in the
opinion of our counsel to the terms and conditions made
available to all holders of the Class A common stock,
including form, type and amount of consideration per share,
the availability of such consideration, and the timing of
payment.
To the extent they deem necessary, our counsel may rely on the opinion of a
nationally recognized investment banking firm in evaluating the terms of any
securities or other consideration being offered.
PREFERRED STOCK
We have 30,000 shares of preferred stock, par value $1.00 per share, of
which 10,000 shares will be issued and outstanding. The preferred stock
o is entitled to dividends in kind at an annual rate of seven
shares of additional preferred stock for each one hundred
shares of preferred stock outstanding for the first five years
and thereafter dividends in cash at the annual rate of 7%,
o has no voting rights except as provided by law, and
o is entitled to be redeemed at $1,000 per share, plus accrued
and unpaid dividends, on a change in control of the Class A or
Class B common stock, or upon the sale of one or more PCS
licenses for cash or a non-cash sale which is subsequently
converted into or redeemed for cash in an amount proportional
to that number of persons covered by the sale of such licenses
for cash, or that portion of a non-cash sale subsequently
converted into or redeemed for cash, compared to the total
persons covered by our three initial PCS licenses, in each
case based on the 1998 or most recent estimates by the United
States Bureau of Census.
Therefore, the number of shares redeemed shall be computed by dividing the
number of persons covered by the sale by the total number of persons covered by
the three initial PCS licenses owned by us.
ANTITAKEOVER EFFECTS OF PROVISIONS OF THE CERTIFICATE OF INCORPORATION, BYLAWS,
DELAWARE LAW AND CONTROL GROUP REQUIREMENTS
CERTIFICATE OF INCORPORATION AND BYLAWS
Several provisions of the our certificate of incorporation and bylaws
could deter or delay unsolicited changes in our control.
DELAWARE TAKEOVER STATUTE
We are subject to Section 203 of the Delaware Law, which, subject to
certain exceptions, prohibits a Delaware corporation from engaging in any
business combination with any interested stockholder for a period of three years
following the date that such stockholder became an interested stockholder,
unless:
o prior to such date, the board of directors of the corporation
approved either the business combination or the transaction
that resulted in the stockholders becoming an interested
stockholder; or
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o upon consummation of the transaction that resulted in the
stockholder becoming an interested stockholder, the interested
stockholder owned at least 85% of the voting stock of the
corporation outstanding at the time the transaction commenced,
excluding for purposes of determining the numbers of shares
owned by persons who are directors and also officers and by
employee stock plans in which employee participants do not
have the right to determine confidentially whether shares held
subject to the plan will be tendered in a tender or exchange
offer; or
o on or subsequent to such date, the business combination is
approved by the board of directors and authorized at an annual
or special meeting of stockholders, and not by written
consent, by the affirmative vote of at least 66 2/3% of the
outstanding voting stock that is not owned by the interested
stockholder.
Section 203 defines business combination to include:
o any merger or consolidation involving the corporation and the
interested stockholder;
o any sale, transfer, pledge or other disposition of 10% or more
of the assets of the corporation involving the interested
stockholder;
o subject to certain exceptions, any transaction that results in
the issuance or transfer by the corporation of any stock of
the corporation to the interested stockholder;
o any transaction involving the corporation that has the effect
of increasing the proportionate share of the stock of any
class or series of the corporation beneficially owned by the
interested stockholder; or
o the receipt by the interested stockholder of the benefit of
any loans, advances, guarantees, pledges or other financial
benefits provided by or through the corporation.
In general, Section 203 defines an interested stockholder as any entity or
person beneficially owning 15% or more of the outstanding voting stock of the
corporation and any entity or person affiliated with or controlling or
controlled by such entity or person.
CONTROL GROUP REQUIREMENTS
In order to meet the Control Group Requirements, our certificate of
incorporation provides that our Class B common stock, as a class, must
constitute 50.1% of our voting power. The structure that we have adopted to
facilitate compliance with the Control Group Requirements will likely deter and
delay unsolicited changes in our control. See "Risk Factors--We are subject to
various C-Block license requirementss" and "-Ms. Kane controls us and such
control could limit potential acquisitions".
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Class A common stock is
[ ].
WARRANTS
There are outstanding warrants to purchase 4,300,000 shares of Class A
common stock at $.75 per share, subject to adjustment. These warrants can be
exercised through a cash purchase, or by surrendering preferred stock and/or
subordinated notes. When exercising warrants through the surrender of
subordinated notes, credit will only be given for the principal of the note, and
not for any accrued interest. When surrendering preferred stock to exercise
warrants, credit will be given for the stock's liquidation value, which is
$1,000 per share. The purchase price and the securities to be received upon
exercise is subject to adjustment in certain cases, including stock dividends,
stock splits, stock combinations, reclassifications, recapitalizations, the
issuance of certain rights or warrants for common stock, certain distributions,
and capital reorganizations, mergers and consolidations and similar events. The
warrants expire on _________, 200__.
In addition, if at any time after the grant of the warrants, the
Company issues common stock at a purchase price per share which is lower than
the purchase price of the warrants or grants or issues of the securities
convertible or exercisable into common stock which have an exercise or
conversion price which is lower than the
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purchase price of the warrants, the purchase price of the warrants will be
adjusted so that it will equal the purchase price of the common stock which has
been issued or the conversion or exercise price of the securities convertible or
exercisable into common stock.
FEDERAL INCOME TAX CONSEQUENCES
The distribution by Lynch Interactive to stockholders of the Class A
common stock of Sunshine PCS Corporation will be characterized as a dividend,
taxable as ordinary income to the extent of Lynch Interactive's current or
accumulated earnings and profits. Although the value of the stock distributed as
a dividend in the spin off will be taxable to the recipient, the taxable amount
is expected to be insignificant. To the extent that all or part of a
distribution to a holder exceeds such holder's allocable share of Lynch
Interactive's current or accumulated earnings and profits, such amount will
first be treated as a return of capital that will reduce the holder's adjusted
tax basis in his shares of Lynch Interactive common stock, and then to the
extent that the distribution exceeds such basis, such excess will be taxed as a
capital gain, and a long-term capital gain if the holder's holding period for
such common stock has been more than one year. Any tax liability to us as a
result of the spin off is also expected to be insignificant.
A corporate holder will generally be entitled to a 70%
dividends-received deduction with respect to distributions that are treated as
dividends on shares of Lynch Interactive common stock that the corporate holder
has held for at least 46 days during the 90-day period that begins 45 days
before the stock becomes ex-dividend. A taxpayer's holding period for this
purpose is reduced by periods during which the taxpayer's risk of loss, with
respect to the shares, is considered diminished by reason of the existence of
certain options, contracts to sell, or other similar transactions. Also, the
dividends-received deduction may be reduced or eliminated if a corporation has
indebtedness "directly attributable to its investment" in portfolio stock.
A corporate holder is required to reduce its basis, but not below zero,
in stock by the non-taxed portion, generally the portion eligible for the
dividends-received deduction described above, of an "extraordinary-dividend" as
defined in Section 1059 of the Internal Revenue Code, if the holder has not held
such stock subject to a risk of loss for more than two years before Lynch
Interactive declared, announced, or agreed to, the amount or payment of such
dividend, whichever is earliest. If any part of the non-taxed portion of an
extraordinary dividend has not been applied to reduce the basis as a result of
the limitation on reducing basis below zero, such part will be treated as gain
from the sale or exchange of stock.
In addition, for purposes of computing its alternative minimum tax
liability, a corporate holder may, in general, be required to include in its
alternative minimum taxable income a portion of any dividends-received deduction
allowed in computing regular taxable income.
The foregoing does not purport to be a complete analysis of all the
potential tax effects of the distribution of our Class A common stock, and is
limited to United States federal income tax matters. The discussion is based
upon the Internal Revenue Code of 1986, as amended, Treasury regulations, and
Internal Revenue Service rulings and judicial decisions now in effect, all of
which are subject to change at any time, possibly with retroactive effect, by
legislative, judicial or administrative action. In addition, the tax
consequences to a particular holder, including life insurance companies,
tax-exempt organizations, financial institutions, dealers in securities, foreign
corporations and nonresident alien individuals, may be affected by matters not
discussed herein.
BECAUSE THE FEDERAL INCOME TAX CONSEQUENCES DISCUSSED HEREIN DEPEND
UPON EACH HOLDER'S PARTICULAR TAX STATUS, AND DEPEND FURTHER UPON FEDERAL TAX
LAWS, REGULATIONS, RULINGS AND DECISIONS, WHICH ARE SUBJECT TO CHANGE THAT MAY
BE RETROACTIVE IN EFFECT, PROSPECTIVE INVESTORS SHOULD CONSULT THEIR OWN TAX
ADVISORS REGARDING THE PARTICULAR TAX CONSEQUENCES OF THE DISTRIBUTION,
INCLUDING, BUT NOT LIMITED TO, THE APPLICATION AND EFFECT OF ANY STATE, LOCAL
FOREIGN AND OTHER TAX LAWS, AS WELL AS THE CONSEQUENCES OF ANY RECENT, PENDING
OR PROPOSED CHANGES IN THE APPLICABLE LAWS.
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PLAN OF DISTRIBUTION
The distribution is self underwritten; neither we nor Lynch Interactive
has employed an underwriter for the distribution of shares of our Class A common
stock in the spin off. We will bear all expenses associated with these
transactions.
EXPERTS
The financial statements of Fortunet Communications, L.P., a
development stage enterprise and predecessor to Sunshine PCS Corporation, at
December 31, 1999 and September 30, 2000, for the years ended December 31, 1998
and 1999, the nine month period ended September 30, 2000 and for the period from
July 27, 1995 (inception) to September 30, 2000, appearing in this Prospectus
and Registration Statement have been audited by Ernst & Young LLP, independent
auditors, as set forth in their report thereon (which contains an explanatory
paragraph describing conditions that raise substantial doubt about the Company's
ability to continue as a going concern as described in Note 1 to the financial
statements) appearing elsewhere herein, and are included in reliance upon such
report given on the authority of such firm as experts in accounting and
auditing.
LEGAL MATTERS
The legality of the shares of Class A common stock distributed in the
spin off will be passed upon by the law firm of Olshan Grundman Frome Rosenzweig
& Wolosky LLP, New York, New York.
ADDITIONAL INFORMATION
We have filed with the SEC a Registration Statement on Form SB-2,
together with all amendments and exhibits thereto, under the Securities Act
covering the securities described herein. This Prospectus does not contain all
of the information set forth in the Registration Statement, certain parts of
which are omitted in accordance with the rules and regulations of the SEC.
Statements contained herein or incorporated herein by reference concerning the
provisions of documents are summaries of such documents, and each statement is
qualified in its entirety by reference to the applicable document if filed with
the SEC or attached as an appendix hereto. For further information, reference is
hereby made to the Registrant Statement and the exhibits file therewith. The
Registration Statement and any amendments thereto, including exhibits, are
available for inspection and copying as set forth above.
Any person who has received a copy of this Prospectus may receive a
complimentary copy of all the documents referred to above which have been
incorporated by reference (other than exhibits to such documents) by making a
written or oral request to us at either the address or telephone number listed
on page 1.
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PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24 Indemnification of Directors and Officers
------- -----------------------------------------
As permitted by the Delaware General Corporation Law ("DGCL"), our
certificate of incorporation limits the personal liability of our directors and
officers for breaches of their fiduciary duties. Liability is not eliminated for
o any breach of the duty of loyalty to us or our stockholders,
o acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law,
o unlawful payment of dividends or stock purchases or
redemptions pursuant to Section 174 of the DGCL, or
o any transaction from which the director derived an improper
personal benefit.
Our bylaws provide that we shall indemnify any person who was or is a
party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding by reason of the fact that he is or was a
director, officer, employee or an agent of ours or is or was serving at our
request as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, against all expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by him in connection with the defense or
settlement of such action, suit or proceeding, to the fullest extent and in the
manner set forth in and permitted by Delaware law, as from time to time in
effect, and any other applicable law, as from time to time in effect. Such right
of indemnification is not be deemed exclusive of any other rights to which such
director, officer, employee or agent and shall inure to the benefit of the
heirs, executors and administrators of each such person.
ITEM 25 Other Expenses of Issuance and Distribution.
------- -------------------------------------------
The following table sets forth the various expenses (other than
underwriting discounts and commissions) which will be paid by Sunshine PCS
Corporation in connection with the issuance and distribution of the securities
being registered. With the exception of the SEC registration fee, all amounts
shown are estimates.
SEC Registration Fee............................................. $ .08
Blue Sky Fees and Expenses....................................... *
Printing and Engraving........................................... *
Accounting Fees and Expenses..................................... *
Legal Fees and Expenses.......................................... *
Miscellaneous expenses........................................... *
--------
Total............................................................ $ *
* To be filed by amendment
ITEM 26 Exhibits and Financial Statement Schedules
------- ------------------------------------------
a. Exhibits:
Exhibit Number Description
------------------ ----------------------------------------------------------
**3.1 Articles of Incorporation
**3.2 By-laws
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**4.1 Form of Subordinated Notes
**5.1 Opinion of Olshan Grundman Frome Rosenzweig & Wolosky LLP
**10.1 Form of Warrant
*23.1 Consent of Ernst & Young LLP
23.2 Consent of Olshan Grundman Frome Rosenzweig & Wolosky LLP
(contained in Exhibit 5.1)
--------------
* Filed herewith
**To be filed by Amendment.
ITEM 28 Undertakings.
------- ------------
The undersigned Registrant hereby undertakes:
o to file, during any period in which if offers or sells
securities, a post-effective amendment to this registration
statement:
o To include any prospectus required by Section
10(a)(3) of the Securities Act of 1933;
o To reflect in the Prospectus any facts or events
which, individually or together, represent a
fundamental change in the information in the
registration statement;
o To include any additional or changed material
information on the plan of distribution.
o That, for the purpose of determining any liability under the
Securities Act, treat each post- effective amendment as a new
registration statement for the securities offered, and the
offering of the securities at that time to be the initial bona
fide offering.
o File a post-effective amendment to remove from registration
any of the securities that remain unsold at the end of the
offering.
o The undersigned registrant hereby undertakes to supplement the
prospectus, after the expiration of the subscription period,
to include the results of the subscription offer, the
transactions by the underwriters during the subscription
period, the amount of unsubscribed securities that the
underwriters will purchase and the terms of any later
reoffering. If the underwriters make any public offering of
the securities on terms different from those on the cover page
of the prospectus, a post-effective amendment will be filed to
state the terms of such offering.
o For purposes of determining any liability under the Securities
Act of 1933, treat the information omitted from the form of
prospectus filed as part of this registration statement in
reliance upon Rule 430A and contained in a form of prospectus
filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act as part of this Registration
Statement as of the time it was declared effective.
o For the purpose of determining any liability under the
Securities Act, treat each post-effective amendment that
contains a form of prospectus as a new registration statement
for the securities offered in the registration statement, and
that offering of the securities at that time as the initial
bona fide offering.
II-2
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and has duly caused this
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Rye, State of New York on the day of November,
2000.
SUNSHINE PCS CORPORATION
By: /s/ Karen E. Johnson
----------------------
Karen E. Johnson
President
SIGNATORIES
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed by the following persons in the
capacities and on the date indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Karen E. Johnson
--------------------------- President (Chief Executive, November 22, 2000
Karen E. Johnson Principal Financial and Chief
Accounting Officer) and Director
/s/ Davis S. Ahl Director November 22, 2000
---------------------------
David S. Ahl
/s/ Robert E. Dolan
--------------------------- Director November 22, 2000
Robert E. Dolan
</TABLE>
II-3
<PAGE>
TABLE OF CONTENTS
PAGE
----
PROSPECTUS SUMMARY.............................................................6
THE COMPANY....................................................................6
RISK FACTORS...................................................................8
Our licenses have FCC build out requirements that
will have to be met in less than one year..............................8
We are a development stage company with historical
and expected future operating losses...................................8
The report of our independent auditors contains an
explanatory paragraph as to our ability to continue
as a going concern.....................................................8
We will need to incur more debt in the future to
meet our build out requirements........................................8
We have not decided how to utilize our PCS licenses,
and there are risks if we choose to sell, enter into
a joint venture, or build out our licenses.............................8
Our potential competitors have substantially greater
access to capital and other resources and
significantly more experience in providing wireless services...........9
The limited capacity of our licenses may
put us at a disadvantage..............................................10
Our licenses only offer limited territorial
coverage and scope of services........................................10
C-Block licenses generally, and our licenses, have a troubled
history, and the value of our licenses has been
written down and could be written down even more......................10
We are subject to substantial government regulation...................10
We are subject to various CBlock license requirements.................11
There are potential health and safety risks involved
with wireless handsets................................................11
If we are required to relocate microwave licensees,
the time and cost of such relocations may have a
material adverse effect on our business...............................11
Ms. Kane controls us and such control could limit
potential acquisitions................................................12
Our common stock is junior to our subordinated notes
and preferred stock...................................................12
Lynch Interactive holds warrants to purchase
4,300,000 shares of our Class A common stock at $.75 per share........12
There will be a very limited trading market or
possibly no trading market at all in our common stock.................12
Our common stock likely will be subject to
"Penny Stock" regulations.............................................12
The FCC's ownership limitations may affect our ownership..............13
USE OF PROCEEDS...............................................................13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND PLAN OF OPERATION.................................................13
THE WIRELESS COMMUNICATIONS INDUSTRY..........................................15
LEGISLATION AND GOVERNMENT REGULATION.........................................19
MANAGEMENT....................................................................26
CERTAIN TRANSACTIONS..........................................................28
PRINCIPAL STOCKHOLDERS........................................................29
DESCRIPTION OF CAPITAL STOCK..................................................30
FEDERAL INCOME TAX CONSEQUENCES...............................................33
PLAN OF DISTRIBUTION..........................................................34
-i-
<PAGE>
EXPERTS.......................................................................34
LEGAL MATTERS.................................................................34
ADDITIONAL INFORMATION........................................................34
FINANCIAL STATEMENTS.........................................................F-1
-ii-
<PAGE>
FINANCIAL STATEMENTS
FORTUNET COMMUNICATIONS, L.P.
(A DEVELOPMENT STAGE ENTERPRISE AND
PREDECESSOR TO SUNSHINE PCS CORPORATION)
INDEX TO FINANCIAL STATEMENTS
Report of Independent Auditors F-2
Balance Sheets F-3
Statements of Operations F-4
Statement of Changes in Partners' Equity/(Deficit) F-5
Statements of Cash Flows F-6
Notes to Financial Statements F-7
F-1
<PAGE>
Partners
Fortunet Communications, L.P.
We have audited the accompanying balance sheets of Fortunet Communications, L.P.
(the "Partnership") a development stage enterprise and predecessor to Sunshine
PCS Corporation, as of December 31, 1999 and September 30, 2000, and the related
statements of operations, changes in partners' equity/(deficit), and cash flows
for the years ended December 31, 1998 and 1999, the nine month period ended
September 30, 2000 and for the period from July 27, 1995 (inception) to
September 30, 2000. These financial statements are the responsibility of the
Partnership's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Fortunet Communications, L.P.
at December 31, 1999 and September 30, 2000, and the results of its operations
and its cash flows for the years ended December 31, 1998 and 1999, the nine
month period ended September 30, 2000 and the period from July 27, 1995
(inception) to September 30, 2000, in conformity with accounting principles
generally accepted in the United States.
The accompanying financial statements have been prepared assuming Fortunet
Communications, L.P. will continue as a going concern. As more fully described
in Note 1, the Partnership has incurred losses since inception, has not yet
adopted a business plan, determined how to finance its operations and may
forfeit its licenses or be subject to the imposition of fines and sanctions if
it does not meet certain build-out requirements. These conditions raise
substantial doubt about the Partnership's ability to continue as a going
concern. The financial statements do not include any adjustments to reflect the
possible future effects on the recoverability and classification of assets or
the amounts and classification of liabilities that may result from the outcome
of this uncertainty.
/s/ Ernst & Young LLP
Stamford, Connecticut
November 17, 2000
F-2
<PAGE>
FORTUNET COMMUNICATIONS, L.P.
(A DEVELOPMENT STAGE ENTERPRISE AND
PREDECESSOR TO SUNSHINE PCS CORPORATION)
BALANCE SHEETS
<TABLE>
<CAPTION>
Pro Forma
(Unaudited)
December 31, September 30, September 30, 2000
1999 2000 (Note 5)
---- ---- --------
<S> <C> <C>
ASSETS
Cash $ - $ - $ 150,000
PCS Licenses 2,686,012 2,686,012 2,686,012
----------- ----------- -----------
Total Assets $ 2,686,012 $ 2,686,012 $ 2,836,012
=========== =========== ===========
LIABILITIES AND PARTNERS'/STOCKHOLDERS'
EQUITY/(DEFICIT)
Long-term debt:
Loan from Limited Partner $69,760,140 $79,985,340 $ -
Subordinated Notes 16,131,117
Preferred Stock, $1.00 par value
Authorized shares - 30,000 250,000
Partners'/stockholders' equity/(deficit)
Common Stock, $0.0001 par value
Class A: Authorized shares - 20,000,000
Class B: Authorized shares - 9,000,000
Additional paid-in capital 64,552,826
Deficit accumulated during the development stage (78,097,931)
General partner's deficit accumulated
during the development stage (12,618,925) (12,721,177) -
Limited partner's deficit accumulated
during the development stage (54,455,203) (64,578,151) -
----------- ----------- -----------
Total partners'/stockholders' deficit
accumulated during the development (67,074,128) (77,299,328) (13,545,105)
stage ----------- ----------- -----------
Total liabilities and
partners'/stockholders' equity/(deficit) $ 2,686,012 $ 2,686,012 $ 2,836,012
=========== =========== ===========
SEE ACCOMPANYING NOTES.
</TABLE>
F-3
<PAGE>
FORTUNET COMMUNICATIONS, L.P.
(A DEVELOPMENT STAGE ENTERPRISE AND
PREDECESSOR TO SUNSHINE PCS CORPORATION)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
JULY 27, 1995
YEAR ENDED DECEMBER 31, NINE MONTHS (INCEPTION)
ENDED SEPTEMBER 30, TO SEPTEMBER 30,
1998 1999 2000 2000
---- ---- -------- ----
<S> <C> <C> <C> <C>
Interest expense (including
commitment fees) $(18,679,726) $(13,001,850) $(10,225,200) $(72,124,832)
Forgiveness of interest expense 19,159,890 - - 19,159,890
Impairment of PCS Licenses - (18,454,112) - (25,032,989)
------------ ------------- ------------- -------------
Net profit (loss) $ 480,164 $(31,455,962) $(10,225,200) $(77,997,931)
============ ============= ============= =============
Net profit (loss) allocated to
general partner $6,472,834 $(9,375,529) $ (102,252) $(13,071,177)
============ ============= ============= =============
Net loss allocated to limited $(5,992,670) $(22,080,433) $(10,122,948) $(64,926,754)
partner ============ ============= ============= =============
Pro-forma earnings $.08 $(5.56) $(1.81)
(loss) per share ============ ============= =============
</TABLE>
SEE ACCOMPANYING NOTES.
F-4
<PAGE>
FORTUNET COMMUNICATIONS, L.P.
(A DEVELOPMENT STAGE ENTERPRISE AND
PREDECESSOR TO SUNSHINE PCS CORPORATION)
STATEMENT OF CHANGES IN PARTNERS' EQUITY/(DEFICIT)
For the period from July 27, 1995 (inception) through September 30, 2000
<TABLE>
<CAPTION>
General partner's Limited partner's Total partner's
equity/(deficit) equity/(deficit) equity/(deficit)
---------------- ---------------- ----------------
<S> <C> <C> <C>
Capital contributions $ 350,000 $ 348,603 $ 698,603
Net loss (4,605) (455,894) (460,499)
------------ ------------ ------------
Balance at December 31, 1995 345,395 (107,291) 238,104
Net loss (850,414) (6,474,655) (7,325,069)
------------ ------------ ------------
Balance at December 31, 1996 (505,019) (6,581,946) (7,086,965)
Net loss (9,211,211) (19,800,154) (29,011,365)
------------ ------------ ------------
Balance at December 31, 1997 (9,716,230) (26,382,100) (36,098,330)
Net profit (loss) 6,472,834 (5,992,670) 480,164
------------ ------------ ------------
Balance at December 31, 1998 (3,243,396) (32,374,770) (35,618,166)
Net Loss (9,375,529) (22,080,433) (31,455,962)
------------ ------------ ------------
Balance at December 31, 1999 (12,618,925) (54,455,203) (67,074,128)
Net loss (102,252) (10,122,948) (10,225,200)
------------ ------------ ------------
Balance at September 30, 2000 ($12,721,177) ($64,578,151) ($77,299,328)
============ ============ ============
</TABLE>
SEE ACCOMPANYING NOTES.
F-5
<PAGE>
FORTUNET COMMUNICATIONS, L.P.
(A DEVELOPMENT STAGE ENTERPRISE AND
PREDECESSOR TO SUNSHINE PCS CORPORATION)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE JULY 27, 1995
YEAR ENDED MONTHS ENDED (INCEPTION)
DECEMBER 31, SEPTEMBER 30, TO SEPTEMBER 30,
1998 1999 2000 2000
---- ---- -------------- ----------------
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net profit (loss) $480,164 $(31,455,962) $(10,225,200) $(77,997,931)
Net change in accrued interest and
Commitment Fees 3,437,852 13,001,850 10,225,200 55,300,142
Impairment of PCS licenses 18,454,112 25,032,989
------------ ------------ ------------ ------------
Net cash provided by operating activities 3,918,016 -- -- 2,335,200
INVESTING ACTIVITIES
Deposits with the FCC -- -- -- (4,200,000)
Purchase of PCS licenses (164,798) -- -- (4,698,398)
Other (61,300) (813) -- (215,710)
------------ ------------ ------------ ------------
Net cash used in investing activities (226,098) (813) -- (9,114,108)
FINANCING ACTIVITIES
Net proceeds from (repayments of) Limited (3,691,918) 813 -- 6,080,305
Partner loans
Capital contributions -- -- -- 698,603
------------ ------------ ------------ ------------
Net cash (used in) provided by financing (3,691,918) 813 -- 6,778,908
activities ------------ ------------ ------------ ------------
Net change in cash -- -- -- --
Cash at beginning of period -- -- -- --
------------ ------------ ------------ ------------
Cash at end of period $ -- $ -- $ -- $ --
============ ============ ============ ============
</TABLE>
SEE ACCOMPANYING NOTES.
F-6
<PAGE>
FORTUNET COMMUNICATIONS, L.P.
(A DEVELOPMENT STAGE ENTERPRISE AND
PREDECESSOR TO SUNSHINE PCS CORPORATION)
NOTES TO FINANCIAL STATEMENTS
December 31, 1999 and Septembers 30, 2000
1. ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Fortunet Communications, L.P. ("Fortunet") was formed on April 18, 1997 to hold
personal communications services ("PCS") licenses that had been acquired in the
Federal Communications Commission's ("FCC") C-Block auction. At that date,
Fortunet succeeded to the assets and assumed the liabilities (the "Transfers")
of five partnerships ("Partnerships") that were the high bidders for licenses in
the auction. The Partnerships that transferred their assets and liabilities to
Fortunet, were Aer Force Communications, L.P. ("Aer Force"), Fortunet
Communications, L.P., High Country Communications, L.P., New England Wireless
Communications, L.P. and Southeast Wireless Communications L.P., all of which
were formed on July 27, 1995. The Partnership's received a proportional interest
in Fortunet based upon the relative market values of the assets and liabilities
transferred.
Sunshine PCS Corporation ("Sunshine") was incorporated on July 13, 2000, with
capital of $1.00, and will succeed to the rights and obligations of Fortunet.
(See Note 5)
PCS is a second-generation digital wireless service utilizing voice, video or
data devices that allow people to communicate at anytime and virtually anywhere.
The FCC auctioned off PCS licenses, a total of 120 MHZ of spectrum, falling
within six separate frequency blocks labeled A through F. Frequency Blocks C and
F were designated by the FCC as "entrepreneurial blocks". Certain qualifying
small businesses including the Partnerships were afforded bidding credits in the
auctions as well as government financing of the licenses acquired. The
Partnerships won 31 licenses in 1996 to provide personal communications services
over 30 MHZ of spectrum to a population of approximately 7.0 million (1990
Census Data).
Fortunet Wireless Communications Corporation ("Fortunet Wireless"), an entity
controlled by Victoria Kane, a private investor, is the General Partner of
Fortunet with a 50.1% equity interest. Subsequent to the transfers, Victoria G.
Kane, owned 60% of the stock of Fortunet Wireless. On May 4, 2000, Ms. Kane
purchased the remaining 40% of Fortunet Wireless for $600,000, and gave the
selling stockholders the right to repurchase the stock so acquired through May
4, 2008 for 120% of her purchase price. Lynch PCS Corporation A, a wholly-owned
subsidiary of Lynch PCS Corporation, which in turn is a wholly-owned subsidiary
of Lynch Interactive Corporation ("Lynch"), a publicly held company, is the
Limited Partner of Fortunet with a 49.9% equity interest. Lynch PCS Corporation
A has agreements to provide a total of $41.8 million of funding to Fortunet, of
which a total of $21 million was funded through September 30, 2000.
BASIS OF PRESENTATION
The Tranfers were nonmonetary transactions and were accounted for under
Accounting Principles Board Opinion 29, "Accounting for Nonmonetary
Transactions". These Transfers, with the exception of the transfer from Aer
Force were accounted at fair value resulting in an increase in the carrying
value of the PCS licenses of $9.9 million. The transfer of Aer Force was
accounted for at historical cost as the general partner owner of Aer Force also
controlled the General Partner of Fortunet after the transfer, and therefore,
such entities were considered under common control. Accordingly, the
accompanying financial statements include the results of Aer Force from
inception, July 27, 1995, and the remaining four partnerships from the date of
the transfer, April 18, 1997.
F-7
<PAGE>
The financial statements are prepared in conformity with generally accepted
accounting principles applicable to a development stage enterprise.
Fortunet's financial statements have been prepared on a going concern basis
which contemplates the realization of assets and the satisfaction of liabilities
in the normal course of business and do not include any adjustments to reflect
the possible future effects on the recoverability and classification of assets
and the amounts and classifications of liabilities that may result from the
possible inability of Fortunet to continue as a going concern.
Fortunet has not yet adopted a business plan or determined how to finance its
operations. Therefore, Fortunet has not yet determined whether to develop its
PCS licenses on its own, enter into joint venture with its licenses, or sell
some or all of its licenses.
Under FCC regulations, Fortunet is required to construct a PCS network that
provides adequate service to at least one-quarter of the population in the areas
covered by the licenses by September 17, 2001, or make a showing of substantial
service in the areas covered by the licenses by that date. Failure to do so
could result in the forfeiture of the licenses or the imposition of fines and
sanctions. Unless Fortunet sells the licenses or enters into a joint venture, it
must raise significant funds to meet this requirement. Fortunet has incurred
losses since inception and, as noted, will need to obtain capital for the
initial build-out of facilities. There can be no assurance that Fortunet can
raise sufficient capital to finance the construction of its networks.
Accordingly, as a result of the items discussed above, there is substantial
doubt about Fortunet's ability to continue as a going concern.
ADMINISTRATIVE SERVICES
Fortunet has no employees. The Limited Partner provided Fortunet and its
predecessors, at their request, with certain services in connection with the
Partnerships' bidding for PCS licenses in the FCC auctions in 1996. Aside from
that matter, neither the General Partner nor the Limited Partner provided
Fortunet with a substantial amount of services. Neither partner charged
Fortunet, for the services provided, as such amounts are not significant.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the carrying amounts of assets and liabilities and
disclosures at the date of the financial statements and the reported amounts of
expenses during the reporting period. Actual results could differ from those
estimates.
CAPITALIZED COSTS
Certain direct costs of acquiring the PCS licenses (such as legal, filing and
other regulatory fees) have been capitalized and included in PCS licenses in the
accompanying balance sheets, amounting to $0.1 million at December 31, 1999 and
September 30, 2000. These costs will be amortized over the remaining life of the
respective PCS licenses when, and if, Fortunet, commences operations.
The PCS licenses will be amortized over a period, consistent with the industry
standard, not to exceed 40 years, which will begin when, and if, operations
commence.
F-8
<PAGE>
INCOME TAXES
The results of operations of the Partnerships and Fortunet are included in the
taxable income or loss of the individual partners and, accordingly, no tax
provision has been recorded. (See Note 5)
2. PCS LICENSES
In the C-Block auction, which ended in May 1996, the combined Partnerships
acquired 31 licenses at net cost, after bidding credits, of $216 million. These
licenses were awarded in September 1996. The FCC provided 90% of the financing
of the cost of these licenses at an interest rate of 7% per annum with interest
due quarterly for years one through six and principal amortization and interest
due quarterly in years seven through ten.
Events during and subsequent to the auction, as well as other externally driven
technological and market forces, made financing the development of these
licenses through the capital markets much more difficult than originally
anticipated. In 1997, Fortunet, as well, as many of the other license holders
from this auction, petitioned the FCC for relief in order to afford these small
businesses the opportunity to more realistically restructure and build-out their
systems. The response from the FCC, which was announced on September 26, 1997,
afforded license holders a choice of four options, one of which was the
resumption of current debt payments, which had been suspended earlier in 1997.
The ramifications of choosing the other three courses of action would result in
Fortunet ultimately forfeiting 30%, 50%, or 100% of the down payments on these
licenses. Accordingly, during 1997, subsequent to the Transfers, Fortunet
provided for a 30% reserve on the down payments (10% of net cost) as this
represented Fortunet's estimate, at the time, of the impairment of this
investment given the then available alternatives. On March 24, 1998, the FCC
modified the four options and provided a July 8, 1998 deadline for a decision.
On June 8, 1998, Fortunet elected to apply its eligible credits relating to its
original down payment to the purchase of three licenses for 15 MHZ of PCS
spectrum in Tallahassee, Panama City and Ocala, Florida. Fortunet returned all
the remaining licenses and forfeited 30% of its original down payment on these
licenses in full satisfaction of the government debt and forgiveness of all
accrued interest. Accordingly, Fortunet is currently the licensee of 15 MHZ of
spectrum in the three Florida markets covering a population ("POP") of
approximately 785,000 at a net cost at auction of $20.09 per POP, based on 1990
census data.
On April 15, 1999, the FCC completed a reauction of all the C-Block licenses
that were returned to it subsequent to original auction, including the 15 MHZ
licenses that Fortunet returned on June 8, 1998. In that reauction, the
successful bidders paid a total of $2.7 million for the three licenses as
compared to the $21.2 million carrying value of the licenses at that time.
Accordingly, Fortunet recorded a write down of its investment, including
capitalized costs, to reflect the amount bid for similar licenses in the
reauction.
3. PARTNERSHIP AGREEMENT
Each of Fortunet's predecessor Partnerships, including Aer Force, were formed in
1995 to bid for PCS licenses in the FCC's "C-Block" auction. The general partner
of Aer Force contributed a total of $350,000 to Aer Force for a 50.1% equity
interest in the partnership and the limited partner contributed $348,603 to Aer
Force for a 49.9% equity interest.
Under the terms of all of the predecessor Partnership Agreements, including Aer
Force, and subsequently Fortunet, all items of deduction with respect to
interest expense and commitment fees incurred in connection with the loan from
the Limited Partner are allocated 99% to the Limited Partner and 1% to the
General Partner. All other deductions are allocated to the Limited and General
Partner on the basis of 49.9% and 50.1%, respectively. All profits are allocated
99% to the Limited Partner and 1% to the General Partner until the aggregate
amount of all
F-9
<PAGE>
profits allocated to the Limited Partner and General Partner equals the items of
deduction with respect to interest expense and commitment fees, except for all
profits that result from the exchange of the PCS licenses with the FCC, which
will be allocated to the Limited Partner and General Partner on the basis of
49.9% and 50.1%, respectively. Subsequently, all profits and losses will be
allocated to the Limited Partner and General Partner in proportion to their
interests, 49.9% and 50.1%, respectively.
4. LONG-TERM DEBT
In connection with the PCS "C-Block" auction, $4.2 million was deposited with
the FCC of which $3.5 million was borrowed from the Limited Partner under a line
of credit which is due and payable on December 1, 2006. On September 27, 1996 an
additional $4.4 million was advanced to cover the remaining down payment on the
licenses won. The interest rate on the outstanding borrowings under the line is
fixed at 15% per annum; additionally, a commitment fee of 20% per annum is being
charged on the total line of credit, which was $25.0 million prior to April 18,
1997 and $41.8 million thereafter. The amounts due to the Limited Partner,
including accrued interest and commitment fees, at December 31, 1999 and
September 30, 2000 are $69.8 million and $80 million, respectively. On March 31,
1997, $1.6 million was advanced to Aer Force to cover the first interest payment
under the FCC debt. Also, on that date $2.3 million was advanced to the other
four partnerships to cover their first interest payment bringing the total
advanced to $3.9 million. As a part of the FCC restructuring plan, the $3.9
million was returned in September 1998 and the loan to the Limited Partner was
repaid to that extent.
Under a recapitalization of the Partnership that is currently being considered,
the Limited Partner would contribute $63.9 million of the outstanding debt as a
capital contribution and the remaining $16.1 million will be converted to newly
created Subordinated Notes (See Note 5).
F-10
<PAGE>
5. SUBSEQUENT EVENTS/PRO FORMA BASIS OF ACCOUNTING (UNAUDITED)
On July 13, 2000, Sunshine (a "C" Corporation) was incorporated to succeed, by
merger, to the rights and obligations of Fortunet (the "Spin Off"), which is
expected to be accounted for at historical cost as Fortunet and Sunshine are
entities under common control. The common stock outstanding of Sunshine will
consist of 2,821,766 shares of Class A Common Stock which will be entitled to
one vote per share and 2,833,076 shares of Class B Common Stock which will be
entitled to five votes per share. In all economic terms, the Class A and Class B
shares are equal. The General Partner will receive 100% of the Class B shares
representing 50.1% of the outstanding common stock and the Limited Partner will
receive 100% of Class A shares representing 49.9% of the common stock. As part
of the reorganization, Lynch PCS Corporation A will contribute $63.9 million of
the debt owed to it as a capital contribution to Sunshine. The remaining
indebtedness of $16.1 million will be restructured into eight equal Subordinated
Notes totaling $16.1 million, at 9% interest, due in three month increments
beginning four years from the date of issuance, subject to acceleration in
certain circumstances. In addition, Sunshine will sell to Lynch for a total of
$250,000, 10,000 shares of Preferred Stock with a total liquidation value of $10
million and warrants to acquire 4.3 million shares of Class A Common Stock at
$.75 per share. The Preferred Stock and warrants will be recorded at their
respective estimated fair values at the time of sale to Lynch. The Limited
Partner will then distribute its shares in Sunshine to Lynch, and then Lynch
will distribute such shares to its shareholders.
Fortunet is expected to have cash of $150,000, net of $100,000 of estimated
offering expenses, at the time of the spin off.
The terms of the Preferred Stock are as follows:
o dividends in kind at an annual rate of seven shares of additional
preferred stock for each one hundred shares of preferred stock outstanding
for the first five years and thereafter dividends in cash at the annual
rate of 7%,
o no voting rights except as provided by law, and
o redeemable at $1,000 per share, plus accrued and unpaid dividends, on a
change in control of the Class A or Class B common stock, or upon the sale
of one or more PCS licenses for cash or a non-cash sale which is
subsequently converted into or redeemed for cash in an amount proportional
to that number of persons convered by the sale of such licenses for cash,
or that portion of a non-cash sale subsequently converted into or redeemed
for cash, compared to the total persons covered by our three initial PCS
licenses, in each case based on the 1998 or most recent estimates by the
United States Bureau of Census.
As a result of the above merger, Sunshine will file a U.S. Federal income tax
return. Accordingly at the date of the reorganization, the company will provide
for deferred income taxes for temporary differences (primarily the reserve for
impairment of PCS licenses) between the financial statement and tax bases of
Sunshine's assets and liabilities. At September 30, 2000 such adjustment will
create a deferred tax asset of approximately $4.5 million, which is fully
reserved in the pro forma financial statements due to uncertainty regarding its
realization.
Pro forma earnings (loss) per share has been calculated assuming that the
5,654,582 shares of common stock of Sunshine (2,821,766 Class A and 2,833,076
Class B) have been outstanding from the beginning of the periods presented.
F-11
